Edgar Filing: FIRST MIDWEST BANCORP INC

mar3110q.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ______________ FORM 10-Q (Mark One)
[X]	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2012
or
[ ]	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _________ to __________.
Commission File Number 0-10967 _______________ FIRST MIDWEST BANCORP, INC. (Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization)		36-3161078 (IRS Employer Identification No.)
One Pierce Place, Suite 1500 Itasca, Illinois 60143-9768 (Address of principal executive offices) (zip code) ______________ Registrant’s telephone number, including area code: (630) 875-7450 ______________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ].
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act). Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X].
As of May 10, 2012, there were 74,900,893 shares of $.01 par value common stock outstanding.

FIRST MIDWEST BANCORP, INC.

FORM 10-Q

TABLE OF CONTENTS

		Page
Part I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)
	Consolidated Statements of Financial Condition	6
	Condensed Consolidated Statements of Income	7
	Consolidated Statements of Comprehensive Income	8
	Consolidated Statements of Changes in Stockholders’ Equity	9
	Condensed Consolidated Statements of Cash Flows	10
	Notes to Condensed Consolidated Financial Statements	11
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	67
Item 4.	Controls and Procedures	68

Part II.	OTHER INFORMATION

Item 1.	Legal Proceedings	68
Item 1A.	Risk Factors	69
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	69
Item 3.	Defaults Upon Senior Securities	69
Item 4.	Mine Safety Disclosures	69
Item 5.	Other Information	69
Item 6.	Exhibits	70

GLOSSARY OF TERMS
First Midwest Bancorp, Inc. provides the following list of acronyms as a tool for the reader. The acronyms identified below are used in the Notes to Condensed Consolidated Financial Statements and in Management’s Discussion and Analysis of Financial Condition & Results of Operations.
ALCO	Asset Liability Committee
ATM	automated teller machine
Bank	First Midwest Bank (the Company’s wholly owned and principal operating subsidiary)
BOLI	Bank-owned life insurance
CDOs	collateralized debt obligations
CMOs	collateralized mortgage obligations
Code	the Code of Ethics and Standards of Conduct of First Midwest Bancorp, Inc.
Common Stock	shares of common stock of First Midwest Bancorp, Inc. $0.01 par value per share, which are traded on the Nasdaq Stock Market under the symbol “FMBI”
Company	First Midwest Bancorp, Inc.
CSV	cash surrender value
FASB	Financial Accounting Standards Board
FDIC	Federal Deposit Insurance Corporation
Federal Reserve	Board of Governors of the Federal Reserve system
FHLB	Federal Home Loan Bank
GAAP	U.S. generally accepted accounting principles
LIBOR	London Interbank Offered Rate
MBSs	Mortgage-backed securities
OREO	Other real estate owned or properties acquired through foreclosure in partial or total satisfaction of certain loans as a result of borrower defaults
OTTI	other-than-temporary impairment
SEC	U.S. Securities and Exchange Commission
TDR	Troubled Debt Restructurings
Treasury	U.S. Department of the Treasury
TRUPS	trust preferred junior subordinated debentures
VIE	variable interest entity

INTRODUCTION

First Midwest Bancorp, Inc. (the “Company”, “we”, or “our”) is a bank holding company headquartered in the Chicago suburb of Itasca, Illinois with operations throughout the greater Chicago metropolitan area as well as northwest Indiana, central and western Illinois, and eastern Iowa. Our principal subsidiary is First Midwest Bank (the “Bank”), which provides a broad range of commercial and retail banking and wealth management services to consumer, commercial and industrial, and public or governmental customers. We are committed to meeting the financial needs of the people and businesses in the communities where we live and work by providing customized banking solutions, quality products, and innovative services that fulfill those financial needs.

AVAILABLE INFORMATION

We file annual, quarterly, and current reports; proxy statements; and other information with the U.S. Securities and Exchange Commission (“SEC”), and we make this information available free of charge on or through the investor relations section of our web site at www.firstmidwest.com/aboutinvestor_overview.asp. You may read and copy materials we file with the SEC from its Public Reference Room at 100 F. Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The following documents are also posted on our web site or are available in print upon the request of any stockholder to our Corporate Secretary:

·	Certificate of Incorporation,

·	Company By-laws,

·	Charters for our Audit, Compensation, and Nominating and Corporate Governance Committees,

·	Related Person Transaction Policies and Procedures,

·	Corporate Governance Guidelines,

·	Code of Ethics and Standards of Conduct (the “Code”), which governs our directors, officers, and employees, and

·	Code of Ethics for Senior Financial Officers.

Within the time period required by the SEC and the Nasdaq Stock Market, we will post on our web site any amendment to the Code and any waiver applicable to any executive officer, director, or senior financial officer (as defined in the Code). In addition, our web site includes information concerning purchases and sales of our securities by our executive officers and directors. The Company’s accounting and reporting policies conform to U.S. generally accepted accounting principles (“GAAP”) and general practice within the banking industry. We post on our website any disclosure relating to certain non-GAAP financial measures (as defined in the SEC’s Regulation G) that we may make public orally, telephonically, by webcast, by broadcast, or by similar means from time to time.

Our Corporate Secretary can be contacted by writing to First Midwest Bancorp, Inc., One Pierce Place, Itasca, Illinois 60143, attention: Corporate Secretary. The Company’s Investor Relations Department can be contacted by telephone at (630) 875-7533 or by e-mail at investor.relations@firstmidwest.com.

CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES

LITIGATION REFORM ACT OF 1995

We include or incorporate by reference in this Quarterly Report on Form 10-Q, and from time to time our management may make, statements that may constitute “forward-looking statements” within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not historical facts, but instead represent only management’s beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside our control. Although we believe the expectations reflected in any forward-looking statements are reasonable, it is possible that our actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in such statements. In some cases, you can identify these statements by forward-looking words such as “may,” “might,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “probable,” “potential,” or “continue,” and the negative of these terms and other comparable terminology. We caution you not to place undue reliance on forward-looking statements, which speak only as of the date of this report or when made.

Forward-looking statements are subject to known and unknown risks, uncertainties, and assumptions and may contain projections relating to our future financial performance including our growth strategies and anticipated trends in our business. For a detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements, you should refer to our Annual Report on Form 10-K for the year ended December 31, 2011 and the sections entitled “Risk Factors” in Part II Item 1A of this report and “Management’s Discussion

and Analysis of Results of Operations,” as well as our subsequent periodic and current reports filed with the SEC. However, these risks and uncertainties are not exhaustive. Other sections of this report describe additional factors that could adversely impact our business and financial performance.

PART 1. FINANCIAL INFORMATION (Unaudited)

ITEM 1. FINANCIAL STATEMENTS

FIRST MIDWEST BANCORP, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Amounts in thousands, except per share data)

				March 31, 2012		December 31, 2011
Assets				(Unaudited)
Cash and due from banks				$	105,722	$	123,354
Interest-bearing deposits in other banks					380,651		518,176
Trading securities, at fair value					16,031		14,469
Securities available-for-sale, at fair value					1,183,975		1,013,006
Securities held-to-maturity, at amortized cost					56,319		60,458
Federal Home Loan Bank and Federal Reserve Bank stock, at cost					46,750		58,187
Loans, excluding covered loans					5,137,328		5,088,113
Covered loans					251,376		260,502
Allowance for loan losses					(116,264)		(119,462)
Net loans					5,272,440		5,229,153
Other real estate owned (“OREO”), excluding covered OREO					35,276		33,975
Covered OREO					16,990		23,455
Federal Deposit Insurance Corporation (“FDIC”) indemnification asset					58,488		65,609
Premises, furniture, and equipment					132,865		134,977
Accrued interest receivable					29,423		29,826
Investment in bank-owned life insurance (“BOLI”)					206,304		206,235
Goodwill and other intangible assets					282,815		283,650
Other assets					163,953		179,064
Total assets				$	7,988,002	$	7,973,594
Liabilities
Noninterest-bearing deposits				$	1,637,593	$	1,593,773
Interest-bearing deposits					4,848,770		4,885,402
Total deposits					6,486,363		6,479,175
Borrowed funds					202,155		205,371
Senior and subordinated debt					231,106		252,153
Payable for securities purchased					16,241		-
Accrued interest payable and other liabilities					79,436		74,308
Total liabilities					7,015,301		7,011,007
Stockholders’ Equity
Preferred stock					-		-
Common stock					858		858
Additional paid-in capital					413,742		428,001
Retained earnings					817,630		810,487
Accumulated other comprehensive loss, net of tax					(10,919)		(13,276)
Treasury stock, at cost					(248,610)		(263,483)
Total stockholders’ equity					972,701		962,587
Total liabilities and stockholders’ equity				$	7,988,002	$	7,973,594
	March 31, 2012			December 31, 2011
	Preferred Shares	Common Shares		Preferred Shares		Common Shares
Par Value	None	$	0.01	None		$		0.01
Shares authorized	1,000		100,000	1,000				100,000
Shares issued	-		85,787	-				85,787
Shares outstanding	-		74,898	-				74,435
Treasury shares	-		10,889	-				11,352
See accompanying notes to unaudited condensed consolidated financial statements.

FIRST MIDWEST BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Amounts in thousands, except per share data)

(Unaudited)

	Quarters Ended March 31,
	2012		2011
Interest Income
Loans	$	61,491	$	62,917
Investment securities		8,934		9,865
Covered loans		4,202		7,822
Federal funds sold and other short-term investments		641		679
Total interest income		75,268		81,283
Interest Expense
Deposits		5,513		7,671
Borrowed funds		515		680
Senior and subordinated debt		4,058		2,286
Total interest expense		10,086		10,637
Net interest income		65,182		70,646
Provision for loan losses		18,210		19,492
Net interest income after provision for loan losses		46,972		51,154
Noninterest Income
Service charges on deposit accounts		8,660		8,144
Wealth management fees		5,392		5,053
Other service charges, commissions, and fees		3,520		3,977
Card-based fees		5,020		4,529
Total fee-based revenues		22,592		21,703
Net securities (losses) gains (reclassified from other comprehensive income)		(943)		540
Net trading gains		1,401		744
Other		1,639		1,230
Total noninterest income		24,689		24,217
Noninterest Expense
Salaries and wages		27,257		25,665
Retirement and other employee benefits		6,793		7,153
Net OREO expense		1,864		3,931
Net occupancy and equipment expense		8,331		9,103
Technology and related costs		2,858		2,623
Professional services		5,629		5,119
FDIC premiums		1,719		2,725
Other expenses		8,162		9,099
Total noninterest expense		62,613		65,418
Income before income tax expense (benefit)		9,048		9,953
Income tax expense (benefit)		1,156		(91)
Net income		7,892		10,044
Preferred dividends and accretion on preferred stock		-		(2,581)
Net income applicable to non-vested restricted shares		(139)		(137)
Net income applicable to common shares	$	7,753	$	7,326
Per Common Share Data
Basic earnings per common share	$	0.11	$	0.10
Diluted earnings per common share	$	0.11	$	0.10
Dividends declared per common share	$	0.01	$	0.01
Weighted-average common shares outstanding		73,505		73,151
Weighted-average diluted common shares outstanding		73,505		73,151
See accompanying notes to unaudited condensed consolidated financial statements.

FIRST MIDWEST BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

(Unaudited)

	Quarters Ended March 31,
	2012		2011
Net income	$	7,892	$	10,044
Available-for-sale securities
Unrealized holding gains:
Before tax		2,899		6,040
Tax effect		(1,099)		(2,355)
Net of tax		1,800		3,685
Less: reclassification of net (losses) gains included in net income:
Before tax		(943)		540
Tax effect		386		(221)
Net of tax		(557)		319
Net unrealized holding gains		2,357		3,366
Total other comprehensive income		2,357		3,366
Total comprehensive income	$	10,249	$	13,410

	Accumulated Unrealized (Loss) Gain on Securities Available- for-Sale		Unrecognized Net Pension Costs		Total Accumulated Other Comprehensive Loss
Balance at January 1, 2011	$	(19,806)	$	(7,933)	$	(27,739)
Other comprehensive income		3,366		-		3,366
Balance at March 31, 2011	$	(16,440)	$	(7,933)	$	(24,373)
Balance at January 1, 2012	$	(354)	$	(12,922)	$	(13,276)
Other comprehensive income		2,357		-		2,357
Balance at March 31, 2012	$	2,003	$	(12,922)	$	(10,919)

See accompanying notes to unaudited condensed consolidated financial statements.

FIRST MIDWEST BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Amounts in thousands, except per share data)

(Unaudited)

	Common Shares Outstanding	Preferred Stock		Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock		Total
Balance at January 1, 2011	74,096	$	190,882	$	858	$	437,550	$	787,678	$	(27,739)	$	(277,184)	$	1,112,045
Comprehensive income									10,044		3,366				13,410
Common dividends declared ($0.01 per common share)	-		-		-		-		(746)		-		-		(746)
Preferred dividends declared ($12.50 per preferred share)	-		-		-		-		(2,413)		-		-		(2,413)
Accretion on preferred stock	-		168		-		-		(168)		-		-		-
Share-based compensation expense	-		-		-		1,625		-		-		-		1,625
Restricted stock activity	449		-		-		(16,760)		-		-		16,552		(208)
Treasury stock purchased for benefit plans	(2)		-		-		(10)		-		-		(1)		(11)
Balance at March 31, 2011	74,543	$	191,050	$	858	$	422,405	$	794,395	$	(24,373)	$	(260,633)	$	1,123,702
Balance at January 1, 2012	74,435	$	-	$	858	$	428,001	$	810,487	$	(13,276)	$	(263,483)	$	962,587
Comprehensive income	-		-		-		-		7,892		2,357		-		10,249
Common dividends declared ($0.01 per common share)	-		-		-		-		(749)		-		-		(749)
Share-based compensation expense	-		-		-		1,533		-		-		-		1,533
Restricted stock activity	464		-		-		(15,777)		-		-		14,853		(924)
Treasury stock purchased for benefit plans	(1)		-		-		(15)		-		-		20		5
Balance at March 31, 2012	74,898	$	-	$	858	$	413,742	$	817,630	$	(10,919)	$	(248,610)	$	972,701

See accompanying notes to unaudited condensed consolidated financial statements.

FIRST MIDWEST BANCORP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollar amounts in thousands) (Unaudited)
	Quarters Ended March 31,
	2012		2011
Net cash provided by operating activities	$	67,862	$	52,953
Investing Activities
Proceeds from maturities, repayments, and calls of securities available-for-sale		81,049		75,166
Proceeds from sales of securities available-for-sale		2,662		44,212
Purchases of securities available-for-sale		(254,881)		(115,792)
Proceeds from maturities, repayments, and calls of securities held-to-maturity		8,050		2,516
Purchases of securities held-to-maturity		(3,911)		(2,414)
Proceeds from the redemption of Federal Home Loan Bank stock		11,437		-
Net (increase) decrease in loans		(66,671)		2,019
Proceeds from claims on BOLI		239		7
Proceeds from sales of OREO		17,156		8,239
Purchases of premises, furniture, and equipment		(536)		(476)
Net cash (used in) provided by investing activities		(205,406)		13,477
Financing Activities
Net increase (decrease) in deposit accounts		7,188		(91,582)
Net decrease in borrowed funds		(3,216)		(30,632)
Payments for the retirement of subordinated debt		(20,004)		-
Cash dividends paid		(746)		(3,155)
Restricted stock activity		(728)		(165)
Excess tax expense related to share-based compensation		(107)		(212)
Net cash used in financing activities		(17,613)		(125,746)
Net decrease in cash and cash equivalents		(155,157)		(59,316)
Cash and cash equivalents at beginning of period		641,530		585,776
Cash and cash equivalents at end of period	$	486,373	$	526,460
Supplemental Disclosures:
Non-cash transfers of loans to OREO	$	12,295	$	12,433
Non-cash transfer of loans held-for-investment to loans held-for-sale		1,500		3,800
Non-cash transfer of loans held-for-sale to loans held-for-investment		1,500		-
Dividends declared but unpaid		749		746

See accompanying notes to unaudited condensed consolidated financial statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation – The accompanying unaudited condensed consolidated interim financial statements of First Midwest Bancorp, Inc. (the “Company”), a Delaware corporation, were prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission for quarterly reports on Form 10-Q. The accounting and reporting policies of the Company and its subsidiaries conform to U.S. generally accepted accounting principles (“GAAP”) and general practice within the banking industry. The accompanying statements do not include certain information and footnote disclosures required by GAAP for complete annual financial statements. Accordingly, these financial statements should be read in conjunction with the Company’s 2011 Annual Report on Form 10-K (“2011 10-K”).

The accompanying unaudited condensed consolidated interim financial statements were prepared in accordance with GAAP and reflect all adjustments that management deems necessary for the fair presentation of the financial position and results of operations for the periods presented. All such adjustments are of a normal recurring nature. The results of operations for the quarter ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

The Company uses the accrual basis of accounting for financial reporting purposes. Certain reclassifications were made to prior year amounts to conform to the current year presentation.

First quarter 2011 results were restated in the Condensed Consolidated Statements of Income to correct a 2011 actuarial pension expense calculation related to the valuation of future early retirement benefits. First quarter 2011 pension expense was increased by $295,000 and income tax expense was reduced by $121,000. The net effect was a reduction to income of $174,000, which had no impact on earnings per common share for first quarter 2011. In addition, there was a corresponding $174,000 reduction to retained earnings in the Consolidated Statements of Changes in Stockholders’ Equity.

Use of Estimates – The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Although these estimates and assumptions are based on the best available information, actual results could differ from those estimates.

Principles of Consolidation – The accompanying consolidated financial statements include the accounts and results of operations of the Company and its subsidiaries after elimination of all significant intercompany accounts and transactions. Assets held in a fiduciary or agency capacity are not assets of the Company or its subsidiaries and are not included in the consolidated financial statements.

The Company owns an interest in certain variable interest entities (“VIEs”) as described in Note 22, “Variable Interest Entities,” contained in the Company’s 2011 10-K. A VIE is a partnership, limited liability company, trust, or other legal entity that (i) does not have sufficient equity to finance its activities without additional subordinated financial support from other parties or (ii) has investors that lack certain characteristics associated with owning a controlling financial interest. The VIEs are not consolidated in the Company’s financial statements since the Company is not the primary beneficiary of any of the VIEs.

The accounting policies related to loans, the allowance for credit losses, and comprehensive income are presented below. For a summary of all other significant accounting policies, please refer to Note 1, “Summary of Significant Accounting Policies,” contained in the Company’s 2011 10-K.

Loans – Loans are carried at the principal amount outstanding, including certain net deferred loan origination fees. Loans held-for-sale are carried at the lower of aggregate cost or fair value and are included in other assets in the Consolidated Statements of Financial Condition. Interest income on loans is accrued based on principal amounts outstanding. Loan and lease origination fees, commitment fees, and certain direct loan origination costs are deferred, and the net amount is amortized over the estimated life of the related loans or commitments as a yield adjustment. Fees related to standby letters of credit, whose ultimate exercise is remote, are amortized into fee income over the estimated life of the commitment. Other credit-related fees are recognized as fee income when earned.

Purchased Impaired Loans – Purchased impaired loans are recorded at their estimated fair values on the respective purchase dates and are accounted for prospectively based on expected cash flows. No allowance for credit losses is recorded on these loans at the acquisition date. In determining the acquisition date fair value of purchased impaired loans and in subsequent

periods, the Company generally aggregates purchased consumer loans and certain smaller balance commercial loans into pools of loans with common risk characteristics, such as delinquency status, credit score, and internal risk rating. Larger balance commercial loans are usually accounted for on an individual basis. Expected future cash flows in excess of the fair value of loans at the purchase date (“accretable yield”) are recorded as interest income over the life of the loans if the timing and amount of the future cash flows can be reasonably estimated. The non-accretable yield represents estimated losses in the portfolio and is equal to the difference between contractually required payments and the cash flows expected to be collected at acquisition.

Subsequent to the purchase date, increases in cash flows over those expected at the purchase date are recognized as interest income prospectively. The present value of any decreases in expected cash flows after the purchase date is recognized by recording a charge-off through the allowance for loan losses.

Non-accrual loans – Generally, commercial loans and loans secured by real estate are placed on non-accrual status (i) when either principal or interest payments become 90 days or more past due based on contractual terms unless the loan is sufficiently collateralized such that full repayment of both principal and interest is expected and is in the process of collection within a reasonable period or (ii) when an individual analysis of a borrower’s creditworthiness indicates a credit should be placed on non-accrual status whether or not the loan is 90 days or more past due. When a loan is placed on non-accrual status, unpaid interest credited to income in the current year is reversed, and unpaid interest accrued in prior years is charged against the allowance for loan losses. After the loan is placed on non-accrual, all debt service payments are applied to the principal on the loan. Future interest income may only be recorded on a cash basis after recovery of principal is reasonably assured. Non-accrual loans are returned to accrual status when the financial position of the borrower and other relevant factors indicate there is no longer doubt that the Company will collect all principal and interest due.

Commercial loans and loans secured by real estate are generally charged-off when deemed uncollectible. A loss is recorded at that time if the net realizable value can be quantified and it is less than the associated principal and interest outstanding. Consumer loans that are not secured by real estate are subject to mandatory charge-off at a specified delinquency date and are usually not classified as non-accrual prior to being charged-off. Closed-end consumer loans, which include installment, automobile, and single payment loans, are generally charged-off in full no later than the end of the month in which the loan becomes 120 days past due.

Generally, purchased impaired loans are considered accruing loans unless reasonable estimates of the timing and amount of future cash flows cannot be determined. Loans without reasonable cash flow estimates are classified as non-accrual loans, and interest income will not be recognized until the timing and amount of the future cash flows can be reasonably determined.

Troubled Debt Restructurings (“TDRs”) – A restructuring of debt is considered a TDR when the creditor, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession, such as forgiveness of principal, reduction of the interest rate, or extension of the maturity, that it would not otherwise consider. Loans are not classified as TDRs when the modification is short-term or results in only an insignificant delay or shortfall in the payments to be received. The Company’s TDRs are determined on a case-by-case basis in connection with ongoing loan collection processes.

The Company does not accrue interest on any TDRs unless it believes collection of all principal and interest under the modified terms is reasonably assured. For a TDR to begin accruing interest, the borrower must demonstrate both some level of past performance and the capacity to perform under the modified terms. Generally, six months of consecutive payment performance by the borrower under the restructured terms is required before a TDR is returned to accrual status. However, the period could vary depending on the individual facts and circumstances of the loan. An evaluation of the borrower’s current creditworthiness is used to assess whether the borrower has the capacity to repay the loan under the modified terms. This evaluation includes an estimate of expected cash flows, evidence of strong financial position, and estimates of the value of collateral, if applicable. However, in accordance with industry regulation, these restructured loans continue to be separately reported as restructured until after the calendar year in which the restructuring occurred if the loan was restructured at reasonable market rates and terms.

Impaired Loans – Impaired loans consist of corporate non-accrual loans and TDRs.

With the exception of loans that were restructured and are still accruing interest, a loan is considered impaired when it is probable that the Company will be unable to collect all contractual principal and interest due according to the terms of the loan agreement based on current information and events. Loans deemed to be impaired are classified as non-accrual and are exclusive of smaller homogeneous loans, such as home equity, 1-4 family mortgages, and installment loans. When a loan is designated as impaired, any subsequent principal and interest payments received are applied to the principal on the loan. Future interest income may only be recorded on a cash basis after recovery of principal is reasonably assured.

Certain impaired loans with balances under a specified threshold are not individually evaluated for impairment. For all other impaired loans, impairment is measured by comparing the estimated value of the loan to the recorded book value. The value of the loan is measured based on the present value of expected future cash flows discounted at the loan’s initial effective interest rate or the fair value of the underlying collateral, less costs to sell, if repayment of the loan is collateral-dependent. All impaired loans are included in non-performing assets. Purchased impaired loans are not reported as impaired loans provided that estimates of the timing and amount of future cash flows can be reasonably determined.

90-Days Past Due Loans – 90-days or more past due loans are loans with principal or interest payments three months or more past due, but that still accrue interest. The Company continues to accrue interest if it determines these loans are sufficiently collateralized and in the process of collection within a reasonable time period.

Allowance for Credit Losses –The allowance for credit losses is comprised of the allowance for loan losses and the reserve for unfunded commitments and is maintained by management at a level believed adequate to absorb estimated losses inherent in the existing loan portfolio. Determination of the allowance for credit losses is inherently subjective since it requires significant estimates and management judgment, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on a migration analysis that uses historical loss experience, consideration of current economic trends, and other factors.

Credit exposures deemed to be uncollectible are charged-off against the allowance for loan losses, while recoveries of amounts previously charged-off are credited to the allowance for loan losses. Additions to the allowance for loan losses are established through the provision for loan losses charged to expense. The amount charged to operating expense depends on a number of factors, including historic loan growth, changes in the composition of the loan portfolio, net charge-off levels, and the Company’s assessment of the allowance for loan losses based on the methodology discussed below.

The allowance for loan losses consists of (i) specific reserves established for probable losses on individual loans for which the recorded investment in the loan exceeds the value of the loan, (ii) an allowance based on a loss migration analysis that uses historical credit loss experience for each loan category, and (iii) the impact of other internal and external qualitative factors.

The specific reserves component of the allowance for loan losses is based on a periodic analysis of impaired loans exceeding a fixed dollar amount where the internal credit rating is at or below a predetermined classification and other loans that management believes are subject to a higher risk of loss, regardless of internal credit rating. The value of the loan is measured based on the present value of expected future cash flows discounted at the loan’s initial effective interest rate or the fair value of the underlying collateral, less costs to sell, if repayment of the loan is collateral-dependent. If the resulting amount is less than the recorded book value, the Company either establishes a valuation allowance (i.e. a specific reserve) as a component of the allowance for loan losses or charges off the amount if it is a confirmed loss.

For corporate loans, the component of the allowance for loan losses based on a loss migration analysis examines actual loss experience for a rolling 8-quarter period and the related internal risk rating and category of loans charged-off. The loss migration analysis is performed quarterly, and the loss factors are updated based on actual experience. The loss component derived from this migration analysis is then adjusted for management’s estimate of losses inherent in the loan portfolio that have yet to be manifested in historical charge-off experience. Management takes into consideration many internal and external qualitative factors when estimating this adjustment, including:

·	Changes in the composition of the loan portfolio, trends in the volume and terms of loans, and trends in delinquent and non-accrual loans that could indicate historical trends do not reflect current conditions;

·	Changes in credit policies and procedures, such as underwriting standards and collection, charge-off, and recovery practices;

·	Changes in the experience, ability, and depth of credit management and other relevant staff;

·	Changes in the quality of the Company’s loan review system and Board of Directors oversight;

·	The existence and effect of any concentration of credit and changes in the level of concentrations, such as market, loan type, or risk rating;

·	Changes in the value of the underlying collateral for collateral-dependent loans;

·	Changes in the national and local economy that affect the collectability of various segments of the portfolio; and

·	The effect of other external factors, such as competition and legal and regulatory requirements, on the level of estimated credit losses in the Company’s loan portfolio.

The Company also maintains a reserve for unfunded commitments, including letters of credit, to provide for the risk of loss inherent in these arrangements. The reserve for unfunded commitments is computed based on a loss migration analysis

similar to that used to determine the allowance for loan losses, taking into consideration probabilities of future funding requirements. The reserve for unfunded commitments is included in other liabilities in the Consolidated Statements of Financial Condition.

The establishment of the allowance for credit losses involves a high degree of judgment and includes a level of imprecision given the difficulty of identifying and assessing the factors impacting loan repayment and estimating the timing and amount of losses. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance for credit losses is dependent upon a variety of factors beyond the Company’s control, including the performance of its loan portfolio, the economy, changes in interest rates and property values, and the interpretation of loan risk classifications by regulatory authorities. While each component of the allowance for credit losses is determined separately, the entire balance is available for the entire loan portfolio.

Comprehensive Income – Comprehensive income is the total of reported net income and other comprehensive income (“OCI”). OCI includes all other revenues, expenses, gains, and losses that are not reported in net income under GAAP. The Company includes the following items, net of tax, in other comprehensive income in the Consolidated Statements of Comprehensive Income: (i) changes in unrealized gains or losses on securities available-for-sale, (ii) changes in the fair value of derivatives designated under cash flow hedges (when applicable), and (iii) changes in unrecognized net pension costs related to the Company’s pension plan.

2. RECENT ACCOUNTING PRONOUNCEMENTS

Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”): In April 2011, the Financial Accounting Standards Board (“FASB”) issued guidance that clarifies the wording used to describe many of the requirements in GAAP for measuring fair value to be consistent with IFRS. In addition, the guidance expands certain disclosure requirements relating to fair value measurements. Specifically, the new guidance requires (i) quantitative information on significant unobservable inputs, (ii) a description of a Company’s valuation processes, (iii) a narrative description of the sensitivity of recurring Level 3 measurements to unobservable inputs, and (iv) the fair value hierarchy level of assets and liabilities that are not carried at fair value but are required to be disclosed at fair value in the footnotes. This guidance is applied prospectively for interim and annual periods beginning after December 15, 2011. The adoption of this guidance on January 1, 2012 did not impact the Company’s financial condition, results of operations, or liquidity.

Reconsideration of Effective Control for Repurchase Agreements: In April 2011, the FASB issued guidance that amends the accounting for repurchase agreements and other similar agreements that both entitle and obligate a transferor to redeem financial assets before maturity. The guidance modifies the criteria for determining when these transactions would be recorded as financing agreements as opposed to purchase or sale agreements with a commitment to resell. This guidance is applied prospectively for interim and annual periods beginning after December 15, 2011. The adoption of this guidance on January 1, 2012 did not impact the Company’s financial condition, results of operations, or liquidity.

Testing Goodwill for Impairment: In September 2011, the FASB issued new guidance that gives an entity the option to first assess qualitative factors to determine whether the two-step impairment test is necessary. If, after assessing those factors, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is not necessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this guidance on January 1, 2012 did not have a material impact on the Company’s financial condition, results of operation, or liquidity.

3. SECURITIES

Securities available-for-sale are carried at fair value with unrealized gains and losses, net of related deferred income taxes, recorded in stockholders’ equity as a separate component of accumulated other comprehensive loss. Securities classified as held-to-maturity are securities that management has the positive intent and ability to hold to maturity and are stated at cost. Trading securities are reported at fair value. Net trading gains represent changes in the fair value of the trading securities portfolio and are included as a separate component of other noninterest income in the Condensed Consolidated Statements of Income.

Securities Portfolio

(Dollar amounts in thousands)

		March 31, 2012							December 31, 2011
		Amortized	Gross Unrealized				Fair		Amortized		Gross Unrealized				Fair
		Cost	Gains		Losses		Value		Cost		Gains		Losses		Value
Securities Available-for-Sale
U.S. agency securities	$	5,029	$	-	$	(18)	$	5,011	$	5,060	$	-	$	(25)	$	5,035
Collateralized residential mortgage obligations (“CMOs”)		504,661		3,839		(954)		507,546		383,828		2,622		(2,346)		384,104
Other residential mortgage-backed securities (“MBSs”)		130,263		5,757		(19)		136,001		81,982		5,732		(23)		87,691
Municipal securities		462,985		25,297		(279)		488,003		464,282		26,155		(366)		490,071
Collateralized debt obligations (“CDOs”)		48,038		-		(34,353)		13,685		48,759		-		(35,365)		13,394
Corporate debt securities		27,539		3,194		-		30,733		27,511		2,514		(11)		30,014
Equity securities:
Hedge fund investment		1,231		705		-		1,936		1,231		385		-		1,616
Other equity securities		992		68		-		1,060		958		123		-		1,081
Total equity securities		2,223		773		-		2,996		2,189		508		-		2,697
Total	$	1,180,738	$	38,860	$	(35,623)	$	1,183,975	$	1,013,611	$	37,531	$	(38,136)	$	1,013,006
Securities Held-to-Maturity
Municipal securities	$	56,319	$	3,045	$	-	$	59,364	$	60,458	$	1,019	$	-	$	61,477
Trading Securities (1)							$	16,031							$	14,469

(1)	Trading securities held by the Company represent diversified investment securities held in a grantor trust under deferred compensation arrangements in which plan participants may direct amounts earned to be invested in securities other than Company stock.

Remaining Contractual Maturity of Securities

(Dollar amounts in thousands)

	March 31, 2012
	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
One year or less	$	14,286	$	14,124	$	10,495	$	11,063
One year to five years		345,276		341,364		18,603		19,609
Five years to ten years		102,598		101,436		10,366		10,927
After ten years		81,431		80,508		16,855		17,765
CMOs		504,661		507,546		-		-
Other residential MBSs		130,263		136,001		-		-
Equity securities		2,223		2,996		-		-
Total	$	1,180,738	$	1,183,975	$	56,319	$	59,364

The carrying value of securities available-for-sale that were pledged to secure deposits and for other purposes as permitted or required by law totaled $491.4 million at March 31, 2012 and $592.7 million at December 31, 2011. No securities held-to-maturity were pledged as of March 31, 2012 or December 31, 2011.

Purchases and sales of securities are recognized on a trade date basis. Realized securities gains or losses are reported in net securities gains in the Condensed Consolidated Statements of Income. The cost of securities sold is recorded using the specific identification method.

Securities Gains (Losses)

(Dollar amounts in thousands)

	Quarters Ended March 31,
	2012		2011
Proceeds from sales	$	2,662	$	44,212
Gains (losses) on sales of securities:
Gross realized gains	$	47	$	808
Gross realized losses		(253)		(268)
Net realized (losses) gains on securities sales		(206)		540
Non-cash impairment charges:
Other-than-temporary securities impairment (“OTTI”)		(737)		-
Portion of other-than-temporary impairment recognized in other comprehensive income		-		-
Net non-cash impairment charges		(737)		-
Net realized (losses) gains	$	(943)	$	540
Income tax (benefit) expense on net realized (losses) gains	$	(386)	$	221
Net trading gains (1)	$	1,401	$	744

(1)	All net trading gains relate to trading securities still held as of March 31, 2012 and March 31, 2011.

The non-cash impairment charges in the table above primarily relate to OTTI charges on CDOs. Accounting guidance requires that only the credit portion of an OTTI charge be recognized through income. In deriving the credit component of the impairment on the CDOs, projected cash flows were discounted at the contractual rate ranging from the London Interbank Offered Rate (“LIBOR”) plus 125 basis points to LIBOR plus 160 basis points. Fair values are computed by discounting future projected cash flows at higher rates, ranging from LIBOR plus 1,300 basis points to LIBOR plus 1,400 basis points. The higher rates are used to account for other market factors, such as liquidity. If a decline in fair value below carrying value is not attributable to credit loss and the Company does not intend to sell the security or believe it would not be more likely than not required to sell the security prior to recovery, the Company records the decline in fair value in other comprehensive income.

Credit-Related CDO Impairment Losses

(Dollar amounts in thousands)

	Quarters Ended March 31,
Number	2012		2011		Life-to-Date
1	$	-	$	-	$	10,360
2		642		-		8,510
3		79		-		1,649
4		-		-		1,078
5		-		-		8,570
6		-		-		243
7		-		-		6,750
	$	721	$	-	$	37,160

Changes in the amount of credit losses recognized in earnings on CDOs and other securities are summarized in the following table.

Changes in Credit Losses Recognized in Earnings

(Dollar amounts in thousands)

	Quarters Ended March 31,
	2012		2011
Cumulative amount recognized at beginning of period	$	36,525	$	35,756
Credit losses included in earnings (1):
Losses recognized on securities that previously had credit losses		737		-
Losses recognized on securities that did not previously have credit losses		-		-
Cumulative amount recognized at end of period	$	37,262	$	35,756

(1)	Included in net securities (losses) gains in the Condensed Consolidated Statements of Income.

The following table presents the aggregate amount of unrealized losses and the aggregate related fair values of securities with unrealized losses as of March 31, 2012 and December 31, 2011.

Securities in an Unrealized Loss Position

(Dollar amounts in thousands)

		Less Than 12 Months				12 Months or Longer				Total
	Number of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
As of March 31, 2012
U.S. agency security	2	$	-	$	-	$	5,011	$	18	$	5,011	$	18
CMOs	26		132,978		589		11,338		365		144,316		954
Other residential mortgage- backed securities	4		612		1		263		18		875		19
Municipal securities	17		1,671		33		6,748		246		8,419		279
CDOs	6		-		-		13,685		34,353		13,685		34,353
Total	55	$	135,261	$	623	$	37,045	$	35,000	$	172,306	$	35,623

As of December 31, 2011
U.S. agency securities	2	$	-	$	-	$	5,035	$	25	$	5,035	$	25
CMOs	30		163,819		1,818		12,628		528		176,447		2,346
Other residential mortgage- backed securities	4		182		17		1,072		6		1,254		23
Municipal securities	19		934		2		7,857		364		8,791		366
CDOs	6		-		-		13,394		35,365		13,394		35,365
Corporate debt securities	1		2,157		11		-		-		2,157		11
Total	62	$	167,092	$	1,848	$	39,986	$	36,288	$	207,078	$	38,136

Approximately 99% of the Company’s CMOs and other MBSs are either backed by U.S. government-owned agencies or issued by U.S. government-sponsored enterprises. Municipal securities are issued by municipal authorities, and the majority is supported by third-party insurance or some other form of credit enhancement. Management does not believe any individual unrealized loss as of March 31, 2012 represents an OTTI. The unrealized losses associated with these securities are not believed to be attributed to credit quality, but rather to changes in interest rates and temporary market movements. In addition, the Company does not intend to sell the securities with unrealized losses, and it is not more likely than not that the Company will be required to sell them before recovery of their amortized cost basis, which may be at maturity.

The unrealized losses on CDOs as of March 31, 2012 reflect the market’s unfavorable view of structured investment vehicles given the current interest rate and liquidity environment. Management does not believe the unrealized losses on the CDOs represent OTTI related to credit deterioration. In addition, the Company does not intend to sell the CDOs with unrealized

losses, and the Company does not believe it is more likely than not that it will be required to sell them before recovery of their amortized cost basis, which may be at maturity.

Significant judgment is required to calculate the fair value of the CDOs, all of which are pooled. Generally, fair value determinations are based on several factors regarding current market and economic conditions related to these securities and the underlying collateral. For these reasons and due to the illiquidity in the secondary market for the CDOs, the Company estimates the fair value of these securities using discounted cash flow analyses with the assistance of a structured credit valuation firm. For additional discussion of the CDO valuation methodology, refer to Note 12, “Fair Value.”

4. LOANS

The following table presents the Company’s loan portfolio by class.

Loan Portfolio

(Dollar amounts in thousands)

	March 31, 2012		December 31, 2011
Commercial and industrial	$	1,496,966	$	1,458,446
Agricultural		237,686		243,776
Commercial real estate:
Office, retail, and industrial		1,366,899		1,299,082
Multi-family		301,356		288,336
Residential construction		99,768		105,836
Commercial construction		142,307		144,909
Other commercial real estate		829,005		888,146
Total commercial real estate		2,739,335		2,726,309
Total corporate loans		4,473,987		4,428,531
Home equity		406,367		416,194
1-4 family mortgages		217,729		201,099
Installment loans		39,245		42,289
Total consumer loans		663,341		659,582
Total loans, excluding covered loans		5,137,328		5,088,113
Covered loans (1)		251,376		260,502
Total loans	$	5,388,704	$	5,348,615
Deferred loan fees included in total loans	$	7,283	$	7,828
Overdrawn demand deposits included in total loans	$	2,173	$	2,850

(1)	For information on covered loans, refer to Note 5, “Covered Assets.”

The Company primarily lends to small and mid-sized businesses, commercial real estate customers, and consumers in the markets in which the Company operates. Within these areas, the Company diversifies its loan portfolio by loan type, industry, and borrower.

It is the Company’s policy to review each prospective credit to determine the appropriateness and the adequacy of security or collateral prior to making a loan. In the event of borrower default, the Company seeks recovery in compliance with state lending laws, the Company’s lending standards, and credit monitoring and remediation procedures.

5. COVERED ASSETS

In 2009 and 2010, the Company acquired the majority of the assets of three financial institutions in FDIC-assisted transactions. Most loans and OREO acquired in these acquisitions are covered by loss sharing agreements with the FDIC (the “FDIC Agreements”), whereby the FDIC will reimburse the Company for the majority of the losses incurred on these assets. A detailed discussion of these transactions is presented in Note 5, “Covered Assets” contained in the Company’s 2011 10-K.

Covered Assets

(Dollar amounts in thousands)

	March 31, 2012		December 31, 2011
Home equity lines (1)	$	44,855	$	45,451
Covered impaired loans		171,014		178,025
Other covered loans (2)		35,507		37,026
Total covered loans		251,376		260,502
FDIC indemnification asset		58,488		65,609
Covered OREO		16,990		23,455
Total covered assets	$	326,854	$	349,566
Covered non-accrual loans	$	19,264	$	19,879
Covered loans past due 90 days or more and still accruing interest	$	33,825	$	43,347

(1)	These loans are open-end consumer loans that are not categorized as purchased impaired loans.
(2)	These are loans that did not have evidence of impairment on the date of acquisition.

The loans purchased in the three FDIC-assisted transactions were recorded at their estimated fair values on the respective purchase dates and are accounted for prospectively based on expected cash flows. Except for leases and revolving loans, including lines of credit and credit card loans, management determined that a significant portion of the acquired loans (“purchased impaired loans”) had evidence of credit deterioration since origination, and it was probable at the date of acquisition that the Company would not collect all contractually required principal and interest payments. Past due covered loans in the table above are past due based on contractual terms but continue to perform in accordance with the Company’s expectations of cash flows.

In connection with the FDIC Agreements, the Company recorded an indemnification asset. To maintain eligibility for the loss share reimbursement, the Company is required to follow certain servicing procedures as specified in the FDIC Agreements.

The accounting policies related to purchased impaired loans are presented in Note 1, “Summary of Significant Accounting Policies.” Accounting for the related FDIC indemnification asset is presented in Note 1, “Summary of Significant Accounting Policies,” contained in the Company’s 2011 10-K.

Changes in the FDIC Indemnification Asset

(Dollar amounts in thousands)

	Quarters Ended March 31,
	2012		2011
Balance at beginning of period	$	65,609	$	95,899
Amortization		(1,979)		(2,242)
Expected reimbursements from the FDIC for changes in expected credit losses (1)		2,034		2,513
Payments received from the FDIC		(7,176)		(10,784)
Balance at end of period	$	58,488	$	85,386

(1)	The increases in indemnification asset were a result of decreases in estimated cash flows on certain loans. The indemnification asset increased by the applicable loss share percentage for additional expected losses.

Changes in the accretable yield for purchased impaired loans were as follows.

Changes in Accretable Yield

(Dollar amounts in thousands)

	Quarters Ended March 31,
	2012		2011
Balance at beginning of period	$	52,147	$	63,616
Accretion		(5,386)		(8,424)
Net reclassifications to non-accretable difference (1)		(5,716)		(4,182)
Balance at end of period	$	41,045	$	51,010

(1)	Amount represents a decrease in the estimated cash flows to be collected over the remaining estimated life of the underlying portfolio.

6. PAST DUE LOANS, ALLOWANCE FOR CREDIT LOSSES, AND IMPAIRED LOANS

Past Due and Non-accrual Loans

The following table presents an aging analysis of the Company’s past due loans as of March 31, 2012 and December 31, 2011. The aging is determined without regard to accrual status. The table also presents non-performing loans, consisting of non-accrual loans (the majority of which are past due) and loans 90 days or more past due and still accruing interest, as of each balance sheet date.

Aging Analysis of Past Due Loans and Non-Performing Loans by Class

(Dollar amounts in thousands)

	Aging Analysis (Accruing and Non-accrual)										Non-performing Loans
	Current		30-89 Days Past Due		90 Days or More Past Due		Total Past Due		Total Loans		Non- accrual Loans		90 Days Past Due Loans, Still Accruing Interest
March 31, 2012
Commercial and industrial	$	1,439,402	$	22,899	$	34,665	$	57,564	$	1,496,966	$	55,158	$	3,525
Agricultural		236,818		159		709		868		237,686		882		393
Commercial real estate:
Office, retail, and industrial		1,329,162		20,045		17,692		37,737		1,366,899		34,831		901
Multi-family		291,061		1,362		8,933		10,295		301,356		9,615		-
Residential construction		77,531		1,768		20,469		22,237		99,768		21,104		-
Commercial construction		124,807		500		17,000		17,500		142,307		20,297		-
Other commercial real estate		793,385		12,842		22,778		35,620		829,005		43,137		963
Total commercial real estate		2,615,946		36,517		86,872		123,389		2,739,335		128,984		1,864
Total corporate loans		4,292,166		59,575		122,246		181,821		4,473,987		185,024		5,782
Home equity		394,424		2,723		9,220		11,943		406,367		8,851		1,596
1-4 family mortgages		211,398		875		5,456		6,331		217,729		5,648		264
Installment loans		38,858		333		54		387		39,245		22		32
Total consumer loans		644,680		3,931		14,730		18,661		663,341		14,521		1,892
Total loans, excluding covered loans		4,936,846		63,506		136,976		200,482		5,137,328		199,545		7,674
Covered loans		191,785		8,394		51,197		59,591		251,376		19,264		33,825
Total loans	$	5,128,631	$	71,900	$	188,173	$	260,073	$	5,388,704	$	218,809	$	41,499
December 31, 2011
Commercial and industrial	$	1,415,165	$	13,731	$	29,550	$	43,281	$	1,458,446	$	44,152	$	4,991
Agricultural		242,727		30		1,019		1,049		243,776		1,019		-
Commercial real estate:
Office, retail, and industrial		1,276,920		2,931		19,231		22,162		1,299,082		30,043		1,040
Multi-family		281,943		1,121		5,272		6,393		288,336		6,487		-
Residential construction		87,606		2,164		16,066		18,230		105,836		18,076		-
Commercial construction		129,310		320		15,279		15,599		144,909		23,347		-
Other commercial real estate		849,066		6,372		32,708		39,080		888,146		51,447		1,707
Total commercial real estate		2,624,845		12,908		88,556		101,464		2,726,309		129,400		2,747
Total corporate loans		4,282,737		26,669		119,125		145,794		4,428,531		174,571		7,738
Home equity		402,842		6,112		7,240		13,352		416,194		7,407		1,138
1-4 family mortgages		192,646		3,712		4,741		8,453		201,099		5,322		-
Installment loans		41,288		625		376		1,001		42,289		25		351
Total consumer loans		636,776		10,449		12,357		22,806		659,582		12,754		1,489
Total loans, excluding covered loans		4,919,513		37,118		131,482		168,600		5,088,113		187,325		9,227
Covered loans		195,289		7,853		57,360		65,213		260,502		19,879		43,347
Total loans	$	5,114,802	$	44,971	$	188,842	$	233,813	$	5,348,615	$	207,204	$	52,574

Allowance for Credit Losses

The Company maintains an allowance for credit losses at a level believed adequate by management to absorb probable losses inherent in the loan portfolio.

Allowance for Credit Losses

(Dollar amounts in thousands)

	Quarters Ended March 31,
	2012		2011
Balance at beginning of period	$	121,962	$	145,072
Loans charged-off		(22,686)		(21,581)
Recoveries of loans previously charged-off		1,278		2,020
Net loans charged-off		(21,408)		(19,561)
Provision for loan losses		18,210		19,492
Balance at end of period	$	118,764	$	145,003
Allowance for loan losses	$	116,264	$	142,503
Reserve for unfunded commitments		2,500		2,500
Total allowance for credit losses	$	118,764	$	145,003

Allowance for Credit Losses by Portfolio Segment

(Dollar amounts in thousands)

	Commercial, Industrial, and Agricultural		Office, Retail, and Industrial		Multi- Family		Residential Construction		Other Commercial Real Estate		Consumer		Covered Loans		Total Allowance
Quarter ended March 31, 2012
Balance at beginning of period	$	46,017	$	16,012	$	5,067	$	14,563	$	24,471	$	14,843	$	989	$	121,962
Loans charged-off		(8,190)		(2,667)		(140)		(683)		(8,354)		(2,378)		(274)		(22,686)
Recoveries of loans previously charged-off		716		2		131		220		7		202		-		1,278
Net loans charged-off		(7,474)		(2,665)		(9)		(463)		(8,347)		(2,176)		(274)		(21,408)
Provision for loan losses		6,172		4,209		24		163		6,325		1,039		278		18,210
Balance at end of period	$	44,715	$	17,556	$	5,082	$	14,263	$	22,449	$	13,706	$	993	$	118,764
Quarter ended March 31, 2011
Balance at beginning of period	$	49,545	$	20,758	$	3,996	$	27,933	$	29,869	$	12,971	$	-	$	145,072
Loans charged-off		(4,974)		(1,199)		(549)		(5,422)		(5,662)		(2,671)		(1,104)		(21,581)
Recoveries of loans previously charged-off		1,837		16		-		4		43		108		12		2,020
Net loans charged-off		(3,137)		(1,183)		( 549)		(5,418)		(5,619)		(2,563)		(1092)		(19,561)
Provision for loan losses		4,181		57		1,205		4,873		5,795		2,289		1,092		19,492
Balance at end of period	$	50,589	$	19,632	$	4,652	$	27,388	$	30,045	$	12,697	$	-	$	145,003

Impaired Loans

A portion of the Company’s allowance for credit losses is allocated to loans deemed impaired. Impaired loans consist of corporate non-accrual loans and TDRs. Smaller homogeneous loans, such as home equity, installment, and 1-4 family mortgages, are not individually assessed for impairment.

Impaired Loans

(Dollar amounts in thousands)

	March 31, 2012		December 31, 2011
Impaired loans individually evaluated for impairment:
Impaired loans with a related allowance for credit losses (1)	$	105,121	$	76,397
Impaired loans with no specific related allowance for credit losses (2)		65,413		83,090
Total impaired loans individually evaluated for impairment		170,534		159,487
Corporate non-accrual loans not individually evaluated for impairment (3)		14,490		15,084
Total corporate non-accrual loans		185,024		174,571
TDRs, still accruing interest		2,076		17,864
Total impaired loans	$	187,100	$	192,435
Valuation allowance related to impaired loans	$	23,103	$	26,095

(1)	These impaired loans require a valuation allowance because the present value of expected future cash flows or the estimated value of the related collateral, less estimated selling costs, is less than the recorded investment in the loans.
(2)	No specific allowance for credit losses is allocated to these loans since they are deemed to be sufficiently collateralized or had charge-offs.
(3)	These are loans with balances under a specified threshold.

The table below provides a breakdown of loans and the related allowance for credit losses by portfolio segment. Loans individually evaluated for impairment include corporate non-accrual loans with the exception of certain loans with balances under a specified threshold.

The present value of any decreases in expected cash flows of covered loans after the purchase date is recognized by recording a charge-off through the allowance for loan losses. Since most covered loans are accounted for as purchased impaired loans and the carrying values of those loans are periodically adjusted for any changes in expected future cash flows, they are not included in the calculation of the allowance for credit losses and are not displayed in this table except for open-end consumer loans.

Loans and Related Allowance for Credit Losses by Portfolio Segment

(Dollar amounts in thousands)

	Loans						Allowance For Credit Losses
	Individually Evaluated For Impairment		Collectively Evaluated For Impairment		Total		Individually Evaluated For Impairment		Collectively Evaluated For Impairment		Total
March 31, 2012
Commercial, industrial, and agricultural	$	49,075	$	1,685,577	$	1,734,652	$	14,975	$	29,740	$	44,715
Commercial real estate:
Office, retail, and industrial		32,813		1,334,086		1,366,899		1,447		16,109		17,556
Multi-family		8,551		292,805		301,356		-		5,082		5,082
Residential construction		20,024		79,744		99,768		3,110		11,153		14,263
Other commercial real estate		60,071		911,241		971,312		3,571		18,878		22,449
Total commercial real estate		121,459		2,617,876		2,739,335		8,128		51,222		59,350
Total corporate loans		170,534		4,303,453		4,473,987		23,103		80,962		104,065
Consumer		-		663,341		663,341		-		13,706		13,706
Total loans, excluding covered loans		170,534		4,966,794		5,137,328		23,103		94,668		117,771
Covered loans (1)		-		44,855		44,855		-		993		993
Total loans included in the calculation of the allowance for credit losses	$	170,534	$	5,011,649	$	5,182,183	$	23,103	$	95,661	$	118,764
December 31, 2011
Commercial, industrial, and agricultural	$	37,385	$	1,664,837	$	1,702,222	$	14,827	$	31,190	$	46,017
Commercial real estate:
Office, retail, and industrial		28,216		1,270,866		1,299,082		1,507		14,505		16,012
Multi-family		5,589		282,747		288,336		20		5,047		5,067
Residential construction		17,378		88,458		105,836		2,502		12,061		14,563
Other commercial real estate		70,919		962,136		1,033,055		7,239		17,232		24,471
Total commercial real estate		122,102		2,604,207		2,726,309		11,268		48,845		60,113
Total corporate loans		159,487		4,269,044		4,428,531		26,095		80,035		106,130
Consumer		-		659,582		659,582		-		14,843		14,843
Total loans, excluding covered loans		159,487		4,928,626		5,088,113		26,095		94,878		120,973
Covered loans (1)		-		45,451		45,451		-		989		989
Total loans included in the calculation of the allowance for credit losses	$	159,487	$	4,974,077	$	5,133,564	$	26,095	$	95,867	$	121,962

(1)	These are open-end consumer loans that are not categorized as purchased impaired loans.

The following table presents loans individually evaluated for impairment by class of loan as of March 31, 2012 and December 31, 2011.

Impaired Loans Individually Evaluated by Class

(Dollar amounts in thousands)

	March 31, 2012								December 31, 2011
	Recorded Investment In								Recorded Investment In
	Loans with No Specific Related Allowance for Credit Losses		Loans with a Related Allowance for Credit Losses		Unpaid Principal Balance		Allowance for Credit Losses Allocated		Loans with No Specific Related Allowance for Credit Losses		Loans with a Related Allowance for Credit Losses		Unpaid Principal Balance		Allowance for Credit Losses Allocated
Commercial and industrial	$	13,364	$	35,154	$	71,648	$	14,975	$	10,801	$	26,028	$	58,591	$	14,827
Agricultural		557		-		557		-		556		-		556		-
Commercial real estate:
Office, retail, and industrial		7,635		25,178		42,873		1,447		11,897		16,319		33,785		1,507
Multi-family		8,551		-		14,087		-		5,072		517		11,265		20
Residential construction		8,666		11,358		35,110		3,110		9,718		7,660		33,124		2,502
Commercial construction		2,107		18,179		24,844		763		19,019		3,790		28,534		758
Other commercial real estate		24,533		15,252		65,333		2,808		26,027		22,083		70,868		6,481
Total commercial real estate		51,492		69,967		182,247		8,128		71,733		50,369		177,576		11,268
Total impaired loans individually evaluated for impairment	$	65,413	$	105,121	$	254,452	$	23,103	$	83,090	$	76,397	$	236,723	$	26,095

	Quarter Ended March 31, 2012				Quarter Ended March 31, 2011
	Average Recorded Investment Balance		Interest Income Recognized (1)		Average Recorded Investment Balance		Interest Income Recognized (1)
Commercial and industrial	$	45,630	$	9	$	51,024	$	6
Agricultural		922		-		2,515		-
Commercial real estate:
Office, retail, and industrial		28,683		-		17,910		12
Multi-family		6,528		-		6,650		2
Residential construction		17,074		-		49,823		-
Commercial construction		22,755		-		25,391		-
Other commercial real estate		51,842		-		44,339		17
Total commercial real estate		126,882		-		144,113		31
Total impaired loans individually evaluated for impairment	$	173,434	$	9	$	197,652	$	37

(1)	Recorded using the cash basis of accounting.

TDRs

Loan modifications are generally performed at the request of the individual borrower and may include reduction in interest rates, changes in payments, and maturity date extensions. A discussion of our accounting policies for TDRs is contained in Note 1 of “Notes to Consolidated Financial Statements” in Item 1 of this Form 10-Q.

TDRs by Class

(Dollar amounts in thousands)

	As of March 31, 2012						As of December 31, 2011
	Accruing (1)		Non-accrual (2)		Total		Accruing (1)		Non-accrual (2)		Total
Commercial and industrial	$	518	$	1,240	$	1,758	$	1,451	$	897	$	2,348
Agricultural		-		-		-		-		-		-
Commercial real estate:
Office, retail, and industrial		220		-		220		1,742		-		1,742
Multi-family		-		1,758		1,758		11,107		1,758		12,865
Residential construction		-		-		-		-		-		-
Commercial construction		-		14,006		14,006		-		14,006		14,006
Other commercial real estate		-		11,467		11,467		227		11,417		11,644
Total commercial real estate		220		27,231		27,451		13,076		27,181		40,257
Total corporate loans		738		28,471		29,209		14,527		28,078		42,605
Home equity		359		409		768		1,093		471		1,564
1-4 family mortgages		979		1,080		2,059		2,089		1,293		3,382
Installment loans		-		-		-		155		-		155
Total consumer loans		1,338		1,489		2,827		3,337		1,764		5,101
Total loans	$	2,076	$	29,960	$	32,036	$	17,864	$	29,842	$	47,706

(1)	These loans are still accruing interest.
(2)	These loans are included in non-accrual loans in the preceding tables.

The following table presents a summary of loans that were restructured during the quarters ended March 31, 2012 and March 31, 2011.

TDRs Restructured During the Period

(Dollar amounts in thousands)

	Quarter Ended March 31, 2012							Quarter Ended March 31, 2011
	Number of Loans	Pre- Modification Recorded Investment		Interest and Escrow Capitalized		Post- Modification Recorded Investment		Number of Loans	Pre- Modification Recorded Investment		Interest and Escrow Capitalized		Post- Modification Recorded Investment
Commercial and industrial	-	$	-	$	-	$	-	2	$	131	$	7	$	138
Home equity	-		-		-		-	5		284		12		296
1-4 family mortgages	3		430		4		434	5		571		30		601
Installment loans	-		-		-		-	1		151		4		155
Total TDRs restructured during the period	3	$	430	$	4	$	434	13	$	1,137	$	53	$	1,190

The specific reserve portion of the allowance for loan losses on TDRs for all segments of loans is determined by estimating the value of the loan. This is determined by discounting the restructured cash flows at the original effective rate of the loan before modification or is based on the fair value of the underlying collateral, less costs to sell, if repayment of the loan is collateral-dependent. If the resulting amount is less than the recorded book value, the Company either establishes a valuation allowance (i.e. specific reserve) as a component of the allowance for loan losses or charges off the impaired balance if it determines that it is a confirmed loss. TDRs had related valuation allowances totaling $916,000 as of March 31, 2012 and $94,000 as of December 31, 2011.

The allowance for loan losses also includes an allowance based on a loss migration analysis for each loan category for loans that are not individually evaluated for impairment. All loans charged-off, including TDRs charged-off, are factored into this calculation by portfolio segment.

TDRs that have payment defaults and do not perform in accordance with the modified terms are transferred to non-accrual. The following table presents TDRs that had payment defaults during the quarters ended March 31, 2012 and March 31, 2011 where the default occurred within twelve months of the restructured date.

TDRs That Defaulted Within Twelve Months of the Restructured Date

(Dollar amounts in thousands)

	Quarters Ended
	March 31, 2012			March 31, 2011
	Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
Home equity	-	$	-	1	$	83
1-4 family mortgages	1		62	-		-
Total	1	$	62	1	$	83

There were no commitments to lend additional funds to borrowers with TDRs as of March 31, 2012 or December 31, 2011.

Credit Quality Indicators

Corporate loans and commitments are assessed for risk and assigned ratings based on various characteristics, such as the borrower’s cash flow, leverage, collateral, management characteristics, and other factors. Ratings for commercial credits are reviewed periodically. On a quarterly basis, consumer loans are assessed for credit quality based on the delinquency status of the loan.

Credit Quality Indicators by Class, Excluding Covered Loans

(Dollar amounts in thousands)

	Pass		Special Mention (1)		Substandard (2)		Non-accrual (3)		Total
March 31, 2012
Commercial and industrial	$	1,358,137	$	45,735	$	37,936	$	55,158	$	1,496,966
Agricultural		226,134		10,670		-		882		237,686
Commercial real estate:
Office, retail, and industrial		1,222,796		63,997		45,275		34,831		1,366,899
Multi-family		287,789		2,528		1,424		9,615		301,356
Residential construction		42,500		21,588		14,576		21,104		99,768
Commercial construction		90,618		23,944		7,448		20,297		142,307
Other commercial real estate		703,618		65,593		16,657		43,137		829,005
Total commercial real estate		2,347,321		177,650		85,380		128,984		2,739,335
Total corporate loans	$	3,931,592	$	234,055	$	123,316	$	185,024	$	4,473,987
December 31, 2011
Commercial and industrial	$	1,308,812	$	57,866	$	47,616	$	44,152	$	1,458,446
Agricultural		232,270		10,487		-		1,019		243,776
Commercial real estate:
Office, retail, and industrial		1,147,026		78,578		43,435		30,043		1,299,082
Multi-family		275,031		5,803		1,015		6,487		288,336
Residential construction		48,806		27,198		11,756		18,076		105,836
Commercial construction		92,568		23,587		5,407		23,347		144,909
Other commercial real estate		746,213		73,058		17,428		51,447		888,146
Total commercial real estate		2,309,644		208,224		79,041		129,400		2,726,309
Total corporate loans	$	3,850,726	$	276,577	$	126,657	$	174,571	$	4,428,531

	Performing		Non-accrual		Total
March 31, 2012
Home equity	$	397,516	$	8,851	$	406,367
1-4 family mortgages		212,081		5,648		217,729
Installment loans		39,223		22		39,245
Total consumer loans	$	648,820	$	14,521	$	663,341
December 31, 2011
Home equity	$	408,787	$	7,407	$	416,194
1-4 family mortgages		195,777		5,322		201,099
Installment loans		42,264		25		42,289
Total consumer loans	$	646,828	$	12,754	$	659,582

(1)	Loans categorized as special mention exhibit potential weaknesses that require the close attention of management, since these potential weaknesses may result in the deterioration of repayment prospects at some future date.
(2)	Loans categorized as substandard continue to accrue interest, but exhibit a well-defined weakness or weaknesses that may jeopardize the liquidation of the debt. The loans continue to accrue interest because they are well secured and collection of principal and interest is expected within a reasonable time.
(3)	Loans categorized as non-accrual exhibit a well-defined weakness or weaknesses that may jeopardize the liquidation of the debt and are characterized by the distinct possibility that the Company could sustain some loss if the deficiencies are not corrected. These loans were placed on non-accrual status.

7. SENIOR AND SUBORDINATED DEBT

The following table presents the Company’s senior and subordinated debt by issuance.

Senior and Subordinated Debt

(Dollar amounts in thousands)

	March 31, 2012		December 31, 2011
5.875% senior notes due in 2016
Principal amount	$	115,000	$	115,000
Discount		(569)		(600)
Total senior notes due in 2016		114,431		114,400
5.85% subordinated notes due in 2016
Principal amount		50,500		50,500
Discount		(22)		(24)
Total subordinated notes due in 2016		50,478		50,476
6.95% junior subordinated debentures due in 2033
Principal amount		66,253		87,351
Discount		(56)		(74)
Total junior subordinated debentures due in 2033		66,197		87,277
Total senior and subordinated debt	$	231,106	$	252,153

The Company’s senior and subordinated debt issuances are described in Note 11, “Senior and Subordinated Debt,” contained in the Company’s 2011 10-K.

In first quarter 2012, the Company redeemed and retired $21.1 million of junior subordinated debentures at a discount of 2.25%. This transaction resulted in the recognition of a pre-tax gain of $256,000, which is included in other noninterest income in the Condensed Consolidated Statements of Income.

8. EARNINGS PER COMMON SHARE

Basic and Diluted Earnings per Common Share

(Amounts in thousands, except per share data)

	Quarters Ended March 31,
	2012		2011
Net income	$	7,892	$	10,044
Preferred dividends		-		(2,413)
Accretion on preferred stock		-		(168)
Net income applicable to non-vested restricted shares		(139)		(137)
Net income applicable to common shares	$	7,753	$	7,326
Weighted-average common shares outstanding:
Weighted-average common shares outstanding (basic)		73,505		73,151
Dilutive effect of common stock equivalents		-		-
Weighted-average diluted common shares outstanding		73,505		73,151
Basic earnings per share	$	0.11	$	0.10
Diluted earnings per share	$	0.11	$	0.10
Anti-dilutive shares not included in the computation of diluted earnings per share (1)		1,863		3,733

(1)	Represents outstanding stock options (and a common stock warrant for the 2011 period) for which the exercise price is greater than the average market price of the Company’s common stock.

9. INCOME TAXES

Income Tax Expense (Benefit)

(Dollar amounts in thousands)

	Quarters Ended March 31,
	2012		2011
Income before income tax expense (benefit)	$	9,048	$	9,953
Income tax expense (benefit):
Federal income tax expense	$	845	$	910
State income tax expense (benefit)		311		(1,001)
Total income tax expense (benefit)	$	1,156	$	(91)
Effective income tax rate		12.8%		(0.9%)

Federal income tax expense and the related effective income tax rate are primarily influenced by the amount of tax-exempt income derived from investment securities and bank-owned life insurance in relation to pre-tax income and state income taxes. State income tax expense (benefit) and the related effective tax rate are influenced by the amount of state tax-exempt income in relation to pre-tax income and state tax rules relating to consolidated/combined reporting and sourcing of income and expense.

Income tax expense for first quarter 2012 was $1.2 million compared to an income tax benefit of $91,000 for first quarter 2011. This increase was due primarily to a $1.6 million state income tax benefit recorded in first quarter 2011 related to an increase in deferred tax assets resulting from an increase in the Illinois corporate tax rate from 7.3% to 9.5% effective January 1, 2011.

Our accounting policies underlying the recognition of income taxes in the Consolidated Statements of Financial Condition and Income are included in Notes 1 and 14 to the Consolidated Financial Statements of our 2011 10-K.

10. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

In the ordinary course of business, the Company enters into derivative transactions as part of its overall interest rate risk management strategy to minimize significant unplanned fluctuations in earnings and cash flows caused by interest rate volatility. The significant accounting policies related to derivative instruments and hedging activities are presented in Note 1, “Summary of Significant Accounting Policies,” contained in the Company’s 2011 10-K.

During the quarters ended March 31, 2012 and 2011, the Company hedged the fair value of fixed rate commercial real estate loans through the use of pay fixed, receive variable interest rate swaps. These derivative contracts were designated as fair value hedges and are valued using observable market prices, if available, or third party cash flow projection models. The fair values of the fair value hedges and the related amount of hedge ineffectiveness recognized were not material for any period presented.

The Company’s derivative portfolio also includes derivative instruments not designated in a hedge relationship consisting of commitments to originate 1-4 family mortgage loans and foreign exchange contracts. The fair value of these instruments was not material for any period presented. The Company had no other derivative instruments as of March 31, 2012 or December 31, 2011. The Company does not enter into derivative transactions for purely speculative purposes.

11. COMMITMENTS, GUARANTEES, AND CONTINGENT LIABILITIES

Credit Commitments and Guarantees

In the normal course of business, the Company enters into a variety of financial instruments with off-balance sheet risk to meet the financing needs of its customers and to conduct lending activities. These instruments include commitments to extend credit and standby and commercial letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Statements of Financial Condition.

Contractual or Notional Amounts of Financial Instruments

(Dollar amounts in thousands)

	March 31, 2012		December 31, 2011
Commitments to extend credit:
Home equity lines	$	254,481	$	257,315
Credit card lines		21,255		21,257
1-4 family real estate construction		10,512		13,300
Commercial real estate		133,918		139,574
Commercial and industrial		608,122		609,601
Overdraft protection program (1)		176,949		178,699
All other commitments		88,051		129,015
Total commitments	$	1,293,288	$	1,348,761
Letters of credit:
1-4 family real estate construction	$	7,861	$	8,661
Commercial real estate		48,339		49,373
All other		55,872		58,532
Total letters of credit	$	112,072	$	116,566
Unamortized fees associated with letters of credit (2) (3)	$	598	$	668
Remaining weighted-average term (in months)		10.10		9.62
Remaining lives (in years)		0.1 to 12.3		0.1 to 12.6

(1)	Federal regulation regarding electronic fund transfers requires consumers to affirmatively consent to the institution’s overdraft service for automated teller machine and one-time debit card transactions before overdraft fees may be assessed on the account. Consumers are provided a specific line for the amount they may overdraw.
(2)	Included in other liabilities in the Consolidated Statements of Financial Condition.
(3)	The Company will amortize these amounts into income over the commitment period.

Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party and are most often issued in favor of a municipality where construction is taking place to ensure the borrower adequately completes the construction.

The maximum potential future payments guaranteed by the Company under standby letters of credit arrangements are equal to the contractual amount of the commitment. If a commitment is funded, the Company may seek recourse through the liquidation of the underlying collateral including real estate, production plants and property, marketable securities, or receipt of cash.

Legal Proceedings

In August 2011, the Bank was named in a purported class action lawsuit filed in the Circuit Court of Cook County, Illinois on behalf of certain of the Bank’s customers who incurred overdraft fees. The complaint was amended in February 2012, and the Bank filed a motion to dismiss the lawsuit in May 2012, which is pending. The lawsuit is based on the Bank’s practices pursuant to debit card transactions, and alleges, among other things, that these practices resulted in customers being unfairly assessed overdraft fees. The lawsuit seeks an unspecified amount of damages and other relief, including restitution.

The Company believes that the complaint contains significant inaccuracies and factual misstatements and that the Bank has meritorious defenses. As a result, the Bank intends to vigorously defend itself against the allegations in the lawsuit.

As of March 31, 2012, there were certain other legal proceedings pending against the Company and its subsidiaries in the ordinary course of business. The Company does not believe that liabilities, individually or in the aggregate, arising from legal proceedings, if any, would have a material adverse effect on the consolidated financial condition of the Company as of March 31, 2012.

12. FAIR VALUE

Fair value represents the amount that would be received to sell an asset or paid to transfer a liability in its principal or most advantageous market in an orderly transaction between market participants at the measurement date. In accordance with fair value accounting guidance, the Company measures and reports fair value differently for various types of financial instruments.

Certain assets and liabilities are measured at fair value on a recurring and non-recurring basis in the Consolidated Statements of Financial Condition. The fair value of certain other financial instruments are not required to be measured at fair value in the Consolidated Statements of Financial Condition and are disclosed in the “Financial Instruments Required to be Disclosed at Fair Value” section of this footnote.

Certain other financial instruments, such as FHLB stock, and all non-financial instruments are excluded from the fair value accounting guidance. Therefore, any aggregation of the estimated fair values presented does not represent the underlying value of the Company.

Depending on the nature of the asset or liability, the Company uses various valuation methodologies and assumptions to estimate fair value. GAAP establishes a three-tiered fair value hierarchy based on the inputs used to measure fair value. The hierarchy is defined as follows:

·	Level 1 – Quoted prices in active markets for identical assets or liabilities.

·	Level 2 – Observable inputs other than level 1 prices, such as quoted prices for similar instruments, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

·	Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. These inputs require significant management judgment or estimation, some of which use model-based techniques and may be internally developed.

Assets and liabilities are assigned to a level within the fair value hierarchy based on the lowest level of significant input used to measure fair value (i.e. if both level 2 assumptions and level 3 assumptions are used, the asset or liability is classified in level 3). Assets and liabilities may change hierarchy level due to market conditions or other circumstances. These transfers are recognized on the date of the event that prompted the transfer. There were no transfers of assets or liabilities between levels of the fair value hierarchy during the periods presented.

Assets and Liabilities Required to be Measured at Fair Value on a Recurring Basis

The following table provides the hierarchy level and corresponding fair value for assets and liabilities required to be measured at fair value on a recurring basis in the Consolidated Statements of Financial Condition.

Recurring Fair Value Measurements

(Dollar amounts in thousands)

	March 31, 2012						December 31, 2011
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Assets:
Trading securities:
Money market funds	$	1,209	$	-	$	-	$	1,565	$	-	$	-
Mutual funds		14,822		-		-		12,904		-		-
Total trading securities		16,031		-		-		14,469		-		-
Securities available-for-sale:
U.S. agency securities		-		5,011		-		-		5,035		-
CMOs		-		507,546		-		-		384,104		-
Other residential MBSs		-		136,001		-		-		87,691		-
Municipal securities		-		488,003		-		-		490,071		-
CDOs		-		-		13,685		-		-		13,394
Corporate debt securities		-		30,733		-		-		30,014		-
Hedge fund investment		-		1,936		-		-		1,616		-
Other equity securities		42		1,018		-		41		1,040		-
Total securities available- for-sale		42		1,170,248		13,685		41		999,571		13,394
Mortgage servicing rights (1)		-		-		878		-		-		929
Liabilities:
Derivative liabilities (2)	$	-	$	2,319	$	-	$	-	$	2,459	$	-

(1)	Included in other assets in the Consolidated Statements of Financial Condition.
(2)	Included in other liabilities in the Consolidated Statements of Financial Condition.

Trading Securities

Trading securities represent diversified investment securities held in a rabbi trust and are invested in money market and mutual funds. The fair value of these money market and mutual funds is based on quoted market prices in active exchange markets and classified in level 1 of the fair value hierarchy. Changes in the fair value of trading securities are included as a separate component of noninterest income in the Condensed Consolidated Statements of Income.

Securities Available-for-Sale

U.S. Agency Securities, CMOs, Other Residential MBSs, Municipal Securities, Corporate Debt Securities, and Other Equity Securities – These securities are primarily fixed income instruments that are not quoted on an exchange, but may be traded in active markets. The fair values are based on quoted prices in active markets or market prices for similar securities obtained from external pricing services or dealer market participants and are classified in level 2 of the fair value hierarchy. Quarterly, the Company evaluates the methodologies used by its external pricing services to develop the fair values to determine whether the results of the valuations are representative of an exit price in the Company’s principal markets and an appropriate representation of fair value.

CDOs – CDOs are classified in level 3 of the fair value hierarchy.

Rollforward of the Carrying Value of CDOs

(Dollar amounts in thousands)

	Quarters Ended March 31,
	2012		2011
Balance at beginning of period	$	13,394	$	14,858
Total (loss) income:
Included in earnings (1)		(721)		-
Included in other comprehensive income (2)		1,012		1,335
Purchases		-		-
Sales		-		-
Issuances		-		-
Settlements		-		-
Balance at end of period	$	13,685	$	16,193
Change in unrealized losses recognized in earnings relating to securities still held at end of period	$	(721)	$	-

(1)	Included in net securities (losses) gains in the Condensed Consolidated Statements of Income and related to securities still held at the end of the period.
(2)	Included in unrealized holding gains in the Consolidated Statements of Comprehensive Income.

The Company estimates the fair values for each CDO using discounted cash flow analyses with the assistance of a structured credit valuation firm. These analyses rely on credit analysis and review of historical financial data for each of the issuers of the securities underlying the individual CDO (the “Issuers”) to estimate the cash flows. These estimates are highly subjective and sensitive to several significant, unobservable input assumptions, including prepayment assumptions, default probabilities, loss given default assumptions, and deferral cure probabilities. The cash flows for each Issuer are then discounted to their present values using LIBOR plus an adjustment to reflect the higher risk inherent in these securities given their complex structures and the impact of the current market environment. Finally, the discounted cash flows for each Issuer are aggregated to derive the estimated fair value for the specific CDO. Specific information for each CDO, as well as the significant unobservable assumptions, is presented in the following table.

Characteristics of CDOs and Unobservable Inputs Significant

to the Valuation of CDOs as of March 31, 2012

(Dollar amounts in thousands)

	CDO Number (1)
	1		2		3		4		5		6
Characteristics:
Class (2)		C-1		C-1		C-1		B1		C		C
Original par	$	17,500	$	15,000	$	15,000	$	15,000	$	10,000	$	6,500
Amortized cost		7,140		6,490		12,990		13,922		1,317		6,179
Fair value		3,180		1,251		2,963		4,168		408		1,715
Lowest credit rating (Moody’s)		Ca		Ca		Ca		Ca		C		Ca
Number of underlying Issuers		46		57		62		63		56		79
Percent of Issuers currently performing		78.3%		78.9%		74.2%		55.6%		60.7%		67.1%
Current deferral and default percent (3)		14.6%		16.9%		12.8%		33.3%		40.4%		27.2%
Expected future deferral and default percent (4)		19.9%		22.1%		16.1%		28.6%		27.2%		12.8%
Excess subordination percent (5)		0.0%		0.0%		1.0%		0.0%		0.0%		5.6%
Discount rate risk adjustment, in basis points (6)		1,400		1,400		1,400		1,300		1,400		1,300
Significant unobservable assumptions, weighted average of Issuers:
Probability of prepayments		8.3%		4.3%		3.2%		7.0%		7.2%		3.2%
Probability of default		22.9%		27.5%		21.5%		29.2%		39.9%		28.1%
Loss given default		88.2%		88.7%		89.8%		92.6%		92.7%		95.3%
Probability of deferral cure		31.8%		24.0%		30.4%		42.9%		32.1%		51.1%

(1)	The Company has a seventh CDO, but no information is reported for that CDO since the security had an amortized cost and fair value of zero as of March 31, 2012.
(2)	Class refers to the Company’s tranche within the security. In a structured investment, a tranche is one of a number of related securities offered as part of the same transaction and relates to the order in which investors receive principal and interest payments (i.e. tranche B pays before tranche C).
(3)	Represents actual deferrals and defaults, net of recoveries, as a percent of the original collateral.
(4)	Represents expected future net deferrals and defaults, net of recoveries, as a percent of the remaining performing collateral.
(5)	Represents additional defaults that the CDO can absorb before the security experiences any credit impairment. The excess subordination percentage is calculated by dividing the amount of potential additional loss that can be absorbed (before the receipt of all expected future principal and interest payments is affected) by the total balance of performing collateral.
(6)	Cash flows are discounted at LIBOR plus this adjustment to reflect the higher risk inherent in these securities given the current market environment.

Most Issuers have the right to prepay the securities on the fifth anniversary of issuance and under other limited circumstances. To estimate prepayments, a credit analysis of each Issuer is performed to ascertain its ability and likelihood to fund a prepayment. If a prepayment occurs, the Company receives cash equal to the par value for the portion of the CDO associated with that Issuer. Since there are a number of Issuers underlying each CDO, prepayments by a small number of Issuers would not likely have a material impact on the fair value of the CDO.

The probability of future defaults is derived for each Issuer based on a credit analysis. The associated assumed loss given default is based on historical default and recovery information provided by a nationally recognized credit rating agency and is assumed to be 90% for banks, 85% for insurance companies, and 100% for Issuers that have already defaulted.

The likelihood an Issuer who is currently deferring payment on the securities will pay all deferred amounts and remain current thereafter is based on an analysis of the Issuer’s asset quality, leverage ratios, and other measures of financial viability.

The impact of changes in these key inputs could result in a significantly higher or lower fair value measurement for each CDO. The timing of the default, the magnitude of the default, and the timing and magnitude of the cure probability are directly interrelated. Defaults that occur sooner and/or are greater than anticipated have a negative impact on the valuation. In addition, a high cure probability assumption has a positive effect on the fair value, and, if a cure event takes place sooner than anticipated, the impact on the valuation is also favorable.

The Company’s Treasury Department monitors the valuation results of each CDO on a quarterly basis, which includes an analysis of historical pricing trends for these types of securities, overall economic conditions (such as tracking LIBOR curves), and the performance of the Issuers’ industries. The Company’s Treasury Department also reviews market activity for the same or similar tranches of the CDOs, when available. Annually, it validates significant assumptions by reviewing detailed back-testing performed by the valuation firm.

Hedge Fund Investment – The Company’s hedge fund investment is classified in level 2 of the fair value hierarchy. The fair value is derived from monthly and annual financial statements provided by hedge fund management. The majority of the hedge fund’s investment portfolio is held in securities that are freely tradable and are listed on national securities exchanges.

Mortgage Servicing Rights

The Company services loans for others totaling $74.7 million as of March 31, 2012 and $78.6 million as of December 31, 2011. These loans are owned by third parties and are not included in the Consolidated Statements of Condition. The Company estimates the fair value of mortgage servicing rights by using a discounted cash flow analysis and classifies them in level 3 of the fair value hierarchy. Additional information regarding the Company’s mortgage servicing rights can be found in Footnote 22, “Fair Value,” in the Company’s 2011 10-K.

Derivative Assets and Derivative Liabilities

The interest rate swaps entered into by the Company are executed in the dealer market, and pricing is based on market quotes obtained from the counterparty. The market quotes were developed using market observable inputs, which primarily include LIBOR. Therefore, derivatives are classified in level 2 of the fair value hierarchy. For its derivative assets and liabilities, the Company also considers non-performance risk, including the likelihood of default by itself and its counterparties, when evaluating whether the market quotes from the counterparty are representative of an exit price.

Assets and Liabilities Required to be Measured at Fair Value on a Non-recurring Basis

The following table provides the hierarchy level and corresponding fair value for each class of assets and liabilities required to be measured at fair value on a non-recurring basis in the Consolidated Statements of Financial Condition.

Non-recurring Fair Value Measurements

(Dollar amounts in thousands)

	March 31, 2012						December 31, 2011
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Collateral-dependent impaired loans	$	-	$	-	$	120,190	$	-	$	-	$	96,220
OREO (1)		-		-		52,266		-		-		57,430
Loans held-for-sale (2)		-		-		1,500		-		-		4,200
Assets held-for-sale (3)		-		-		7,933		-		-		7,933

(1)	Includes covered OREO.
(2)	Included in other assets in the Consolidated Statements of Financial Condition.
(3)	Included in premises, furniture, and equipment in the Consolidated Statements of Financial Condition.

Collateral-Dependent Impaired Loans

Certain collateral-dependent impaired loans are subject to fair value adjustments to reflect the difference between the carrying value of the loans and the value of the underlying collateral. The fair values of collateral-dependent impaired loans are primarily determined by current appraised values of the underlying collateral, net of estimated selling costs, which range from 0% - 6%. Circumstances may warrant an adjustment to the appraised value based on the age and/or type of appraisal, and these adjustments typically range from 0% - 20%. Generally, appraisals greater than twelve months old are adjusted to account for estimated declines in the real estate market until an updated appraisal can be obtained. In addition, the Company may adjust appraised values to account for differences in disposition strategies, such as adjusting a “stabilized” value to an “orderly liquidation” value. In certain cases, an internal valuation may be used when the underlying collateral is located in areas where comparable sales data is limited or unavailable. Accordingly, collateral-dependent impaired loans are classified in level 3 of the fair value hierarchy.

Collateral-dependent impaired loans for which the fair value is greater than the recorded investment are not measured at fair value in the Consolidated Statements of Financial Condition and are not included in this disclosure.

Other Real Estate Owned

OREO consists of properties acquired through foreclosure in partial or total satisfaction of certain loans. Upon initial transfer into OREO, properties are recorded at the lower of the recorded investment in the related loan(s) or the fair value, which represents the current appraised value of the properties, less estimated selling costs (which range from 0% - 6%). In certain circumstances, a current appraisal may not be available or the current appraised value may not represent an accurate measurement of the property’s fair value due to outdated market information or other factors. In these cases, the fair value is determined based on the lower of the (i) current appraised value, (ii) broker price opinion, (iii) current listing price, or (iv) signed sales contract. Given these valuation methods, OREO is classified in level 3 of the fair value hierarchy. Any write-downs in the carrying value of a property at the time of initial transfer into OREO are charged against the allowance for loan losses.

Subsequent to the initial transfer, periodic impairment analyses of OREO are performed, and new appraisals are obtained as necessary taking into consideration current real estate market trends and adjustments to listing prices. Any write-downs of the properties subsequent to initial transfer, as well as gains or losses on disposition and income or expense from the operations of OREO, are recognized in the Company’s operating results in the period in which they occur.

Loans Held-for-Sale

As of March 31, 2012, one office loan was classified as held-for-sale, and it was transferred into the held-for-sale category at the sales contract price. Accordingly, the loan held-for-sale is classified in level 3 of the fair value hierarchy.

Assets Held-for-Sale

In the second quarter of 2011, the Company entered into an agreement to sell an office property and classified it as held-for-sale. The fair value of the property is based on a third quarter 2011 sales contract price and classified in level 3 of the fair value hierarchy.

Fair Value Adjustments Recorded for

Assets Measured at Fair Value on a Non-Recurring Basis

(Dollar amounts in thousands)

	Quarters Ended March 31,
	2012				2011
	Charged to Allowance for Loan Losses		Charged to Earnings		Charged to Allowance for Loan Losses		Charged to Earnings
Collateral-dependent impaired loans	$	18,740	$	-	$	16,810	$	-
OREO		-		690		-		1,112
Loans held-for-sale		3,135		-		200		-
Assets held-for-sale		-		-		-		310

Goodwill and Other Intangible Assets

Goodwill and other intangible assets are subject to impairment testing, which requires a significant degree of management judgment and the use of significant unobservable inputs. Goodwill is tested at least annually for impairment or more often if events or circumstances between annual tests indicate that there may be impairment. If the testing had resulted in impairment, the Company would have classified goodwill and other intangible assets subjected to nonrecurring fair value adjustments as a level 3 nonrecurring fair value measurement. Additional information regarding goodwill, other intangible assets, and impairment policies can be found in Note 1, “Summary of Significant Accounting Policies,” and Note 8, “Goodwill and Other Intangible Assets,” contained in the Company’s 2011 Form 10-K.

Financial Instruments Required to be Disclosed at Fair Value

The Company is required to disclose the estimated fair values of certain financial instruments that are not required to be measured at fair value in the Consolidated Statements of Financial Position. The following table provides the hierarchy level and related fair value measurement for each class of these financial assets and liabilities.

Financial Instruments Required to be Disclosed at Fair Value

(Dollar amounts in thousands)

	March 31, 2012								December 31, 2011
	Carrying Amount		Fair Value						Carrying Amount		Fair Value
	Carrying Amount		Level 1		Level 2		Level 3		Carrying Amount		Level 1		Level 2		Level 3
Assets:
Cash and due from banks	$	105,722	$	105,722	$	-	$	-	$	123,354	$	123,354	$	-	$	-
Interest-bearing deposits in other banks		380,651		-		380,651		-		518,176		-		518,176		-
Securities held-to- maturity:
Municipal securities		56,319		-		59,364		-		60,458		-		61,477		-
Loans, net of allowance for loan losses:
Commercial and industrial		1,496,966		-		-		1,498,870		1,458,446		-		-		1,460,972
Agricultural		237,686		-		-		236,753		243,776		-		-		243,035
Office, retail, and industrial		1,366,899		-		-		1,375,680		1,299,082		-		-		1,303,288
Multi-family		301,356		-		-		304,217		288,336		-		-		290,645
Residential construction		99,768		-		-		100,165		105,836		-		-		106,145
Commercial construction		142,307		-		-		142,503		144,909		-		-		145,305
Other commercial real estate		829,005		-		-		833,919		888,146		-		-		890,275
Home equity		406,367		-		-		387,653		416,194		-		-		394,404
1-4 family mortgages		217,729		-		-		222,162		201,099		-		-		206,115
Installment loans		39,245		-		-		40,218		42,289		-		-		43,030
Covered loans		251,376		-		-		274,983		260,502		-		-		288,021
Allowance for loan losses		(116,264)		-		-		(116,264)		(119,462)		-		-		(119,462)
Loans, net of allowance for loan losses		5,272,440		-		-		5,300,859		5,229,153		-		-		5,251,773
FDIC indemnification asset		58,488		-		-		31,486		65,609		-		-		37,173
Accrued interest receivable		29,423		-		29,423				29,826		-		29,826
Investment in BOLI		206,304		-		-		206,304		206,235		-		-		206,235
Liabilities:
Deposits
Demand deposits	$	1,637,593	$	-	$	1,637,593	$	-	$	1,593,773	$	-	$	1,593,773	$	-
Savings deposits		1,030,554		-		1,030,554		-		970,016		-		970,016		-
NOW accounts		1,055,558		-		1,055,558		-		1,057,887		-		1,057,887		-
Money market deposits		1,173,388		-		1,173,388		-		1,198,382		-		1,198,382		-
Time deposits		1,589,270		-		1,591,759		-		1,659,117		-		1,659,251		-
Total deposits		6,486,363		-		6,488,852		-		6,479,175		-		6,479,309		-
Borrowed funds		202,155		-		205,777		-		205,371		-		208,728		-
Senior and subordinated debt		231,106		226,442		-		-		252,153		237,393		-		-
Accrued interest payable		7,155		-		7,155		-		4,019		-		4,019		-
Standby letters of credit		598		-		598		-		668		-		668		-

Management uses various methodologies and assumptions as described below to determine the estimated fair values of the Company’s financial instruments. The fair value estimates are made at a discrete point in time based on relevant market information and consider management’s judgments regarding future expected economic conditions, loss experience, and risk characteristics of the financial instruments.

Short-Term Financial Assets and Liabilities - For financial instruments with a shorter-term or with no stated maturity, prevailing market rates, and limited credit risk, the carrying amounts approximate fair value. Those financial instruments

include cash and due from banks, interest-bearing deposits in other banks, federal funds sold and other short-term investments, mortgages held-for-sale, accrued interest receivable, and accrued interest payable.

Securities Held-to-Maturity - The fair value of securities held-to-maturity is based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

Loans, net of Allowance for Loan Losses - The fair value of loans is estimated using the present value of the future cash flows of the remaining maturities of the loans. Prepayment assumptions that consider the Company’s historical experience and current economic and lending conditions were included. The discount rate was based on the LIBOR yield curve with adjustments for liquidity and credit risk.

Covered Loans - The fair value of the covered loan portfolio is determined by discounting the expected cash flows at a market interest rate, which is derived from LIBOR swap rates over the life of these loans. The expected cash flows are determined using the contractual terms of the covered loans, net of any projected credit losses. For valuation purposes, these loans are placed into groups with similar characteristics and risk factors. The timing and amount of credit losses for each group are estimated using historical default and loss experience, current collateral valuations, borrower credit scores, and internal risk ratings. For individually significant loans or credit relationships, the estimated fair value is determined by a specific loan level review utilizing appraised values for collateral and projections of the timing and amount of cash flows.

FDIC Indemnification Asset - The fair value of the FDIC indemnification asset is calculated by discounting the cash flows expected to be received from the FDIC. The future cash flows are estimated by multiplying expected losses on covered loans and covered OREO by the reimbursement rates set forth in the FDIC Agreements. Improvements in estimated cash flows on covered loans and covered OREO generally result in a corresponding decline in the indemnification asset, while reductions in expected reimbursements from the FDIC lead to an increase in the indemnification asset.

Investment in BOLI - The fair value of BOLI approximates the carrying amount as both are based on each policy’s respective cash surrender value (“CSV”), which is the amount the Company would receive upon liquidation of these investments. The CSV is derived from monthly reports provided by the managing brokers and is determined using the Company’s initial insurance premium and earnings of the underlying assets, offset by management fees.

Deposit Liabilities - The fair values disclosed for demand deposits, savings deposits, NOW accounts, and money market deposits are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The fair value for fixed-rate time deposits was estimated using the future cash flows discounted based on the LIBOR yield curve, plus or minus the spread associated with current pricing.

Borrowed Funds - The fair value of repurchase agreements and FHLB advances is estimated by discounting the agreements based on maturities using the rates currently offered for repurchase agreements of similar remaining maturities. The carrying amounts of federal funds purchased, federal term auction facilities, and other borrowed funds approximate their fair value due to their short-term nature.

Senior and Subordinated Debt - The fair value of senior and subordinated debt was determined using quoted market prices.

Standby Letters of Credit - The fair value of standby letters of credit represents deferred fees arising from the related off-balance sheet financial instruments. These deferred fees approximate the fair value of these instruments and are based on several factors, including the remaining terms of the agreement and the credit standing of the customer.

Commitments - The Company estimated the fair value of commitments outstanding to be immaterial based on the following factors: (i) the limited interest rate exposure posed by the commitments outstanding due to their variable nature, (ii) the general short-term nature of the commitment periods entered into, (iii) termination clauses provided in the agreements, and (iv) the market rate of fees charged.

13. SUBSEQUENT EVENTS

The Company evaluated the impact of events that occurred subsequent to March 31, 2012 through the date its consolidated financial statements were issued. Based on the evaluation, management does not believe any subsequent events occurred that would require further disclosure or adjustment to the consolidated financial statements.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

The following discussion and analysis is intended to address the significant factors affecting our results of operations and financial condition for the quarters ended March 31, 2012 and 2011. When we use the terms “First Midwest,” the “Company,” “we,” “us,” and “our,” we mean First Midwest Bancorp, Inc., a Delaware Corporation, and its consolidated subsidiaries. When we use the term “Bank,” we are referring to our wholly owned banking subsidiary, First Midwest Bank. For your reference, a glossary of certain terms is presented on page 3 of this Form 10-Q. Management’s discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying notes presented elsewhere in this report, as well as in our 2011 Annual Report on Form 10-K (“2011 10-K”). Results of operations for the quarter ended March 31, 2012 are not necessarily indicative of future results.

Our banking network is located primarily in suburban metropolitan Chicago with additional locations in northwest Indiana, central and western Illinois, and eastern Iowa. We provide a full range of business and retail banking and wealth management services through approximately 100 banking offices. Our primary sources of revenue are net interest income and fees from financial services provided to customers. Our largest expenses are interest on deposits and compensation expense.

Our results of operations are affected by various factors, many of which are beyond our control, including interest rates, general economic conditions (nationally and in our service areas), business spending, consumer confidence, certain seasonal factors, legislative changes, and changes in real estate and securities markets. Our management evaluates performance using a variety of qualitative and quantitative metrics. Primary quantitative metrics include:

Pre-Tax, Pre-Provision Operating Earnings - Pre-tax, pre-provision operating earnings (which reflect our operating performance before the effects of credit-related charges and other unusual, infrequent, or non-recurring revenues and expenses) is a non-GAAP financial measure, which we believe is useful because it helps investors to assess the Company’s operating performance. A reconciliation of pre-tax, pre-provision operating earnings to GAAP can be found in Table 1.

Net Interest Income - Net interest income is our primary source of revenue. Net interest income equals the difference between interest income and fees earned on interest-earning assets (such as loans and securities) and interest expense incurred on interest-bearing liabilities (such as deposits and borrowed funds).

Net Interest Margin - Net interest margin equals net interest income divided by total interest-earning assets.

Noninterest Income - Noninterest income is the income we earn from fee-based revenues (such as service charges on deposit accounts and wealth management fees), BOLI and other income, and non-operating revenues (such as securities gains and losses).

Asset Quality - Asset quality is an estimation of the quality of our loan portfolio, including an assessment of the credit risk related to existing and potential loss exposure, and incorporates an evaluation of a variety of factors, such as non-performing loans to total loans.

Regulatory Capital – Our regulatory capital is classified in one of the following two tiers: (i) Tier 1 capital consists of common equity, retained earnings, qualifying non-cumulative perpetual preferred stock, and qualifying trust-preferred securities, less goodwill and most intangible assets and (ii) Tier 2 capital includes qualifying subordinated debt and the allowance for credit losses, subject to limitations.

Unless otherwise stated, all earnings per common share data included in this section and throughout the remainder of this discussion are presented on a diluted basis.

PERFORMANCE OVERVIEW

Table 1

Selected Financial Data (1)

(Dollar and share amounts in thousands, except per share data)

	Quarters Ended March 31,
	2012		2011		% Change
Operating Results
Interest income	$	75,268	$	81,283	(7.4)
Interest expense		(10,086)		(10,637)	(5.2)
Net interest income		65,182		70,646	(7.7)
Fee-based revenues		22,592		21,703	4.1
Other noninterest income		2,784		1,974	41.0
Noninterest expense, excluding losses realized on OREO (2)		(61,995)		(63,191)	(1.9)
Pre-tax, pre-provision operating earnings (3)		28,563		31,132	(8.3)
Provision for loan losses		(18,210)		(19,492)	(6.6)
Net (losses) gains on securities sales		(206)		540	N/M
Securities impairment losses		(737)		-	100.0
Gain on early extinguishment of debt		256		-	100.0
Write-downs of OREO (2)		(690)		(1,112)	(37.9)
Net gains (losses) on sales of OREO (2)		387		(1,115)	N/M
Severance-related costs (2)		(315)		-	100.0
Income before income tax		9,048		9,953	(9.1)
Income tax (expense) benefit		(1,156)		91	N/M
Net income		7,892		10,044	(21.4)
Preferred dividends and accretion on preferred stock		-		(2,581)	(100.0)
Net income applicable to non-vested restricted shares		(139)		(137)	1.5
Net income applicable to common shares	$	7,753	$	7,326	5.8
Weighted average diluted shares outstanding		73,505		73,151
Diluted earnings per common share	$	0.11	$	0.10
Performance Ratios (1)
Return on average common equity		3.21%		3.20%
Return on average assets		0.40%		0.50%
Net interest margin – tax equivalent		3.88%		4.15%
Efficiency ratio		64.62%		62.70%

N/M – Not meaningful.

(1)	All ratios are presented on an annualized basis.
(2)	For further discussion of net gains (losses) OREO and severance-related costs, see the “Noninterest Expense” section of this Item 2.
(3)	Our accounting and reporting policies conform to GAAP and general practice within the banking industry. As a supplement to GAAP, we provided this non-GAAP performance result, which we believe is useful because it assists investors in assessing our operating performance. Although it is intended to enhance investors’ understanding of our business and performance, this non-GAAP financial measure should not be considered an alternative to GAAP.

	March 31, 2012		December 31, 2011		March 31, 2011		March 31, 2012 Change From
	March 31, 2012		December 31, 2011		March 31, 2011		December 31, 2011		March 31, 2011
Balance Sheet Highlights
Total assets	$	7,988,002	$	7,973,594	$	8,036,609	$	14,408	$	(48,607)
Total loans, excluding covered loans		5,137,328		5,088,113		5,095,543		49,215		41,785
Total loans, including covered loans		5,388,704		5,348,615		5,444,989		40,089		(56,285)
Total deposits		6,486,363		6,479,175		6,419,894		7,188		66,469
Transactional deposits		4,897,093		4,820,058		4,545,670		77,035		351,423
Loans, excluding covered loans, to deposits ratio		79.2%		78.5%		79.4%
Transactional deposits to total deposits		75.5%		74.4%		70.8%

	March 31, 2012		December 31, 2011		March 31, 2011		March 31, 2012 Change From
	March 31, 2012		December 31, 2011		March 31, 2011		December 31, 2011		March 31, 2011
Asset Quality Highlights (1)
Non-accrual loans	$	199,545	$	187,325	$	186,563	$	12,220	$	12,982
90 days or more past due loans (still accruing interest)		7,674		9,227		5,231		(1,553)		2,443
Total non-performing loans		207,219		196,552		191,794		10,667		15,425
TDRs (still accruing interest)		2,076		17,864		14,120		(15,788)		(12,044)
Other real estate owned		35,276		33,975		33,863		1,301		1,413
Total non-performing assets	$	244,571	$	248,391	$	239,777	$	(3,820)	$	4,794
30-89 days past due loans (still accruing interest)	$	21,241	$	27,495	$	28,927	$	(6,254)	$	(7,686)
Allowance for credit losses	$	118,764	$	121,962	$	145,003	$	(3,198)	$	(26,239)
Allowance for credit losses as a percent of loans		2.31%		2.40%		2.85%
Allowance for credit losses to non-accrual loans		60%		65%		78%

(1)

Excludes covered loans and covered OREO. For a discussion of covered assets, which consist of covered loans, covered OREO, and the related FDIC indemnification asset, refer to Note 5 of “Notes to Condensed Consolidated Financial Statements” in Item 1 of this Form 10-Q. Asset quality, including covered loans and covered OREO, is included in the “Loan Portfolio and Credit Quality” section of this Item 2.

Net income applicable to common shareholders for first quarter 2012 was $7.8 million, or $0.11 per share, compared to net income applicable to common shareholders of $7.3 million, or $0.10 per share, for first quarter 2011. Pre-tax, pre-provision operating earnings of $28.6 million for first quarter 2012 decreased $2.6 million, or 8.3%, compared to first quarter 2011.

In fourth quarter 2011, we redeemed and retired $193.0 million Series B preferred stock held by the United States Department of the Treasury (the “Treasury”) using a combination of existing liquid assets and proceeds from the completion of a $115.0 million senior debt offering. This transaction replaced a $2.4 million quarterly preferred dividend with $1.8 million in quarterly interest expense on the new senior debt. Although the Series B preferred stock redemption eliminated our quarterly preferred dividends and benefited net income applicable to common shares, it did not impact pre-tax, pre-provision operating earnings. The additional interest expense related to the senior debt reduced our quarterly pre-tax, pre-provision operating earnings and affects its comparison to prior periods.

A discussion of net interest income and noninterest income and expense is presented in the following section titled “Earnings Performance.”

Non-performing assets, excluding covered loans and covered OREO, were $244.6 million at March 31, 2012, decreasing $3.8 million, or 1.5%, from December 31, 2011. The reduction was substantially due to remediation activities, charge-offs, the

return of $16.0 million in TDRs to performing status, and $8.5 million in OREO dispositions, largely offset by the downgrade of performing loans.

Loans 30 to 89 days past due and still accruing interest, excluding covered loans, of $21.2 million at March 31, 2012 declined $6.3 million, or 22.7%, from December 31, 2011. This represents the lowest level of 30 to 89 days past due loans since 2003. For further discussion of non-performing assets and past due loans, refer to the “Loan Portfolio and Credit Quality” section of this Item 2.

EARNINGS PERFORMANCE

Net Interest Income

Net interest income is our primary source of revenue. Net interest income equals the difference between interest income and fees earned on interest-earning assets (such as loans and securities) and interest expense incurred on interest-bearing liabilities (such as deposits and borrowed funds). Interest rates and the volume and mix of interest-earning assets and interest-bearing liabilities impact net interest income. Net interest margin equals net interest income divided by total average interest-earning assets. The accounting policies underlying the recognition of interest income on loans, securities, and other interest-earning assets are presented in Note 1 to the Consolidated Financial Statements of our 2011 10-K.

Our accounting and reporting policies conform to GAAP and general practice within the banking industry. For purposes of this discussion, both net interest income and net interest margin were adjusted to a fully tax-equivalent basis to more appropriately compare the returns on certain tax-exempt loans and securities to those on taxable interest-earning assets. Although we believe that these non-GAAP financial measures enhance investors’ understanding of our business and performance, they should not be considered an alternative to GAAP. The effect of this adjustment is at the bottom of Table 2.

Table 2 summarizes our average interest-earning assets and interest-bearing liabilities for the quarters ended March 31, 2012 and 2011, the related interest income and interest expense for each earning asset category and funding source, and the average interest rates earned and paid. Table 2 also details differences in interest income and expense from the prior year and the extent to which any changes are attributable to volume and rate fluctuations.

Table 2

Net Interest Income and Margin Analysis

(Dollar amounts in thousands)

	Quarters Ended March 31,										Attribution of Change in Net Interest Income (1)
	2012					2011					Attribution of Change in Net Interest Income (1)
	Average Balance		Interest		Yield/ Rate (%)	Average Balance		Interest		Yield/ Rate (%)	Volume		Yield/ Rate			Total
Assets:
Short-term investments	$	449,788	$	275	0.25	$	467,880	$	292	0.25	$	(11)	$	(6)	$	(17)
Trading securities		14,585		36	0.99		15,372		30	0.78		(1)		7		6
Investment securities (2)		1,163,338		11,734	4.03		1,166,991		13,048	4.47		(41)		(1,273)		(1,314)
FHLB and Federal Reserve Bank stock		52,531		330	2.51		61,338		357	2.33		(60)		33		(27)
Loans, excluding covered loans (2)		5,089,286		61,983	4.90		5,075,840		63,301	5.06		215		(1,533)		(1,318)
Covered interest-earning assets (3)		318,569		4,202	5.31		444,242		7,822	7.14		(1,919)		(1,701)		(3,620)
Total loans		5,407,855		66,185	4.92		5,520,082		71,123	5.23		(1,704)		(3,234)		(4,938)
Total interest-earning assets (2)		7,088,097		78,560	4.45		7,231,663		84,850	4.75		(1,817)		(4,473)		(6,290)
Cash and due from banks		109,717					121,494
Allowance for loan losses		(123,667)					(148,051)
Other assets		883,044					889,845
Total assets	$	7,957,191				$	8,094,951
Liabilities and Stockholders’ Equity:
Savings deposits	$	995,955		283	0.11	$	901,205		476	0.21		57		(250)		(193)
NOW accounts		1,051,870		218	0.08		1,044,280		320	0.12		2		(104)		(102)
Money market deposits		1,184,316		521	0.18		1,240,439		860	0.28		(37)		(302)		(339)
Time deposits		1,621,926		4,491	1.11		1,937,890		6,015	1.26		(917)		(607)		(1,524)
Borrowed funds		203,548		515	1.02		285,847		680	0.96		(211)		46		(165)
Senior and subordinated debt		248,232		4,058	6.57		137,745		2,286	6.73		1,805		(33)		1,772
Total interest-bearing liabilities		5,305,847		10,086	0.76		5,547,406		10,637	0.78		699		(1,250)		(551)
Demand deposits		1,591,198					1,342,013
Other liabilities		89,778					83,217
Stockholders’ equity - common		970,368					929,315
Stockholders’ equity - preferred		-					193,000
Total liabilities and stockholders’ equity	$	7,957,191				$	8,094,951
Net interest income/margin (2)			$	68,474	3.88			$	74,213	4.15	$	(2,516)	$	(3,223)	$	(5,739)
Net interest income (GAAP)			$	65,182				$	70,646
Tax equivalent adjustment				3,292					3,567
Tax-equivalent net interest income			$	68,474				$	74,213

(1)	For purposes of this table, changes which are not due solely to volume changes or rate changes are allocated to these categories on the basis of the percentage relationship of each to the sum of the two.
(2)	Interest income and yields are presented on a tax-equivalent basis, assuming a federal income tax rate of 35%.
(3)	Covered interest-earning assets consist of loans acquired through FDIC-assisted transactions and the related FDIC indemnification asset. For additional discussion, please refer to Note 5 of “Notes to Consolidated Financial Statements” in Item 1 of this Form 10-Q.

Average interest-earning assets for first quarter 2012 decreased $143.6 million, or 2.0%, from first quarter 2011. This reduction was primarily attributable to a decline in average covered interest-earning assets acquired in FDIC-assisted transactions.

First quarter 2012 tax-equivalent net interest income decreased $5.7 million, or 7.7%, compared to first quarter 2011. Tax-equivalent interest income declined $6.3 million due to a 30 basis point decline in tax-equivalent yield discussed below. Interest expense declined $551,000, as a reduction in interest expense paid on time and other deposits was partially offset by an increase in interest expense paid on senior and subordinated debt.

The growth in average senior and subordinated debt for first quarter 2012 compared to first quarter 2011 reflects the issuance of $115.0 million in senior debt in fourth quarter 2011, which was used to partially fund the redemption of the Series B

preferred stock issued to the Treasury. Interest expense paid on the new senior debt reduced net interest margin by 10 basis points in first quarter 2012.

Tax-equivalent net interest margin for first quarter 2012 was 3.88%, a decline of 27 basis points from first quarter 2011, primarily reflecting interest paid on the new senior debt, a decline in average covered interest-earning assets, and the impact of lower interest rate spreads earned on loans and investment securities resulting from a decline in market interest rates over this period.

Interest earned on covered loans is generally recognized through the accretion of the discount taken on expected future cash flows. The yield on covered interest-earning assets for first quarter 2012 declined from first quarter 2011, which included adjustments in accretable yield based on actual cash realized in excess of estimates upon final settlement of certain covered loans.

Noninterest Income

A summary of noninterest income for the quarters ended March 31, 2012 and 2011 is presented in the following table.

Table 3

Noninterest Income Analysis

(Dollar amounts in thousands)

	Quarters Ended March 31,
	2012		2011		% Change
Service charges on deposit accounts	$	8,660	$	8,144	6.3
Wealth management fees		5,392		5,053	6.7
Other service charges, commissions, and fees		3,520		3,977	(11.5)
Card-based fees (1)		5,020		4,529	10.8
Total fee-based revenues		22,592		21,703	4.1
BOLI income (2)		248		252	(1.6)
Other income (3)		1,135		978	16.1
Total operating revenues		23,975		22,933	4.5
Net trading gains (4)		1,401		744	88.3
Net (losses) gains on securities sales (5)		(206)		540	N/M
Securities impairment losses (5)		(737)		-	N/M
Gain on early extinguishment of debt (6)		256		-	N/M
Total noninterest income	$	24,689	$	24,217	1.9

N/M – Not meaningful.

(1)	Card-based fees consist of debit and credit card interchange fees charged for processing transactions as well as various fees charged on both customer and non-customer automated teller machine (“ATM”) and point-of-sale transactions processed through the ATM and point-of-sale networks.
(2)	BOLI income represents benefit payments received and the CSV of the policies, net of premiums paid. The change in CSV is attributed to earnings or losses credited to the policies based on investments made by the insurer. For a further discussion of our investment in BOLI, see Note 1 to the Consolidated Financial Statements of our 2011 10-K.
(3)	Other income consists of various items, including safe deposit box rentals, miscellaneous recoveries, and gains on the sales of various assets.
(4)	Net trading gains result from changes in the fair value of trading securities. Our trading securities represent diversified investment securities held in a grantor trust under deferred compensation arrangements in which plan participants may direct amounts earned to be invested in securities other than Company stock. Net trading gains are substantially offset by an adjustment to salaries and wages expense.
(5)	For a discussion of these items, see the “Investment Portfolio Management” section of this Item 2.
(6)	The gain on early extinguishment of debt relates to the retirement of approximately $21 million in trust preferred junior subordinated debentures.

Total noninterest income increased 1.9% for first quarter 2012 compared to first quarter 2011. The growth reflects increases in several categories of operating revenues, which were partially offset by net securities losses for first quarter 2012 compared to net securities gains for first quarter 2011.

Fee-based revenues for first quarter 2012 rose 4.1% compared to first quarter 2011 as a result of market-driven price increases that were effective in second quarter 2011 and contributed to growth in service charges, commissions, and fees and card-based fees. The increase in service charges on deposit accounts was partially offset by a decline in the number of occurrences of non-sufficient funds fees.

The first quarter 2012 increase in wealth management fees compared to the same period in 2011 was driven by higher levels of assets under management and custody, a one-time court-approved estate fee, and greater transaction volumes. Assets under management and custody grew over $80 million from March 31, 2011 to March 31, 2012 driven by sales generated through increased staffing levels and improved market performance.

A decline in merchant fees resulting from lower processing volumes by certain larger merchants drove the decrease in other service charges, commissions, and fees from first quarter 2011 to first quarter 2012. There is a corresponding decline in merchant card expense in the table that follows.

Noninterest Expense

The following table presents the components of noninterest expense for the quarters ended March 31, 2012 and 2011.

Table 4

Noninterest Expense Analysis

(Dollar amounts in thousands)

	Quarters Ended March 31,
	2012		2011		% Change
Compensation expense:
Salaries and wages (1)	$	27,257	$	25,665	6.2
Employee benefits (1)		6,793		7,153	(5.0)
Total compensation expense		34,050		32,818	3.8
Net OREO expense:
Write-downs of OREO		690		1,112	(37.9)
Net (gains) losses on sales of OREO (2)		(387)		1,115	N/M
Net OREO operating expense (3)		1,561		1,704	(8.4)
Total OREO expense		1,864		3,931	(52.6)
Professional services:
Loan remediation costs		2,788		2,848	(2.1)
Other professional services (1)		2,841		2,271	25.1
Total professional services		5,629		5,119	10.0
Net occupancy expense		6,205		6,784	(8.5)
Equipment expense		2,126		2,319	(8.3)
Technology and related costs		2,858		2,623	9.0
FDIC insurance premiums		1,719		2,725	(36.9)
Advertising and promotions		870		1,079	(19.4)
Merchant card expense		1,796		2,088	(14.0)
Other expenses		5,496		5,932	(7.3)
Total noninterest expense	$	62,613	$	65,418	(4.3)
Full-time equivalent employees		1,757		1,845	(4.8)
Efficiency ratio (4)		64.62%		62.70%

N/M – Not meaningful.

(1)	In first quarter 2012, the Company recorded a $315,000 charge for severance costs related to an organizational realignment. The charge included $258,000 in salaries and wages, $26,000 in retirement and other employee benefits, and $31,000 in other professional services.
(2)	For a discussion of sales of OREO properties, refer to the “Non-performing assets” section of this Item 2.
(3)	Net OREO operating expense consists of real estate taxes, commissions paid on sales, insurance, and maintenance, net of any rental income.
(4)	The efficiency ratio expresses noninterest expense, excluding OREO expense, as a percentage of tax-equivalent net interest income plus total fees and other income.

Total noninterest expense for first quarter 2012 declined 4.3% from first quarter 2011.

Salaries and wages in first quarter 2012 were higher than first quarter 2011 due to annual merit increases and higher expense related to an increase in the obligations to participants in deferred compensation plans resulting from changes in the fair value of trading securities held on behalf of plan participants. Excluding this year-over-year fair value increase (which is largely offset by an increase in noninterest income described above), salaries and wages would have increased 3.3% from first quarter 2011. The variance in employee benefits for this period primarily resulted from lower pension and profit sharing expense.

OREO expenses for first quarter 2012 declined 52.6% from first quarter 2011 due to lower OREO write-downs in addition to gains realized on the sale of OREO properties in first quarter 2012 compared to losses realized for first quarter 2011.

Other professional services for first quarter 2012 included higher personnel recruitment expense compared to first quarter 2011 as well as certain non-recurring items. Occupancy expense benefited from a mild winter season as lower snow removal and utility costs were incurred in first quarter 2012 compared to first quarter 2011. FDIC premiums decreased compared to first quarter 2011 primarily due to a change in regulatory requirements for calculating the premium.

Income Taxes

Our provision for income taxes includes both federal and state income tax expense. An analysis of the provision for income taxes is detailed in the following table.

Table 5

Income Tax Expense (Benefit) Analysis

(Dollar amounts in thousands)

	Quarters Ended March 31,
	2012		2011		% Change
Income before income tax expense (benefit)	$	9,048	$	9,953	(9.1)
Income tax expense (benefit):
Federal income tax expense	$	845	$	910	(7.1)
State income tax expense (benefit)		311		(1,001)	N/M
Total income tax expense (benefit)	$	1,156	$	(91)	N/M
Effective income tax rate		12.8%		(0.9%)

N/M – Not meaningful.

Income tax expense was $1.2 million for first quarter 2012 compared to an income tax benefit of $91,000 for first quarter 2011. This increase was due primarily to a $1.6 million state income tax benefit recorded in first quarter 2011 related to an increase in deferred tax assets resulting from an increase in the Illinois corporate tax rate from 7.3% to 9.5% effective January 1, 2011.

FINANCIAL CONDITION

Investment Portfolio Management

Securities that we have the positive intent and ability to hold until maturity are classified as securities held-to-maturity and are accounted for using historical cost, adjusted for amortization of premiums and accretion of discounts. Trading securities are carried at fair value with changes in fair value included in other noninterest income. Our trading securities consist of securities held in a rabbi trust for our nonqualified deferred compensation plan and are not considered part of the traditional investment portfolio. All other securities are classified as securities available-for-sale and are carried at fair value.

We manage our investment portfolio to maximize the return on invested funds within acceptable risk guidelines, to meet pledging and liquidity requirements, and to adjust balance sheet interest rate sensitivity to mitigate the impact of changes in interest rates on net interest income.

From time to time, we adjust the size and composition of our securities portfolio based on a number of factors, including expected loan growth, anticipated changes in collateralized public funds on account, the interest rate environment, and the related value of various segments of the securities markets. The following table provides a valuation summary of our investment portfolio.

Table 6

Investment Portfolio Valuation Summary

(Dollar amounts in thousands)

	March 31, 2012							December 31, 2011
	Fair Value		Unrealized Gains (Losses)		Amortized Cost		% of Total Amortized Cost	Fair Value		Unrealized Gains (Losses)		Amortized Cost		% of Total Amortized Cost
Available-for-Sale
U.S. agency securities	$	5,011	$	(18)	$	5,029	0.4	$	5,035	$	(25)	$	5,060	0.5
CMOs		507,546		2,885		504,661	40.8		384,104		276		383,828	35.7
Other MBSs		136,001		5,738		130,263	10.5		87,691		5,709		81,982	7.7
Municipal securities		488,003		25,018		462,985	37.4		490,071		25,789		464,282	43.2
CDOs		13,685		(34,353)		48,038	3.9		13,394		(35,365)		48,759	4.5
Corporate debt securities		30,733		3,194		27,539	2.2		30,014		2,503		27,511	2.6
Equity securities		2,996		773		2,223	0.2		2,697		508		2,189	0.2
Total available-for- sale		1,183,975		3,237		1,180,738	95.4		1,013,006		(605)		1,013,611	94.4
Held-to-Maturity
Municipal securities		59,364		3,045		56,319	4.6		61,477		1,019		60,458	5.6
Total securities	$	1,243,339	$	6,282	$	1,237,057	100.0	$	1,074,483	$	414	$	1,074,069	100.0

	March 31, 2012			December 31, 2011
	Effective Duration (1)	Average Life (2)	Yield to Maturity (3)	Effective Duration (1)	Average Life (2)	Yield to Maturity (3)
Available-for-Sale
U.S. agency securities	0.71%	0.28	4.13%	0.85%	0.53	4.01%
CMOs	1.32%	2.48	1.32%	0.92%	2.19	1.57%
Other MBSs	2.52%	4.08	3.24%	1.96%	3.91	4.50%
Municipal securities	3.95%	3.56	6.08%	3.84%	3.77	6.13%
CDOs	0.25%	8.52	0.00%	0.25%	8.57	0.00%
Other securities	5.98%	10.12	6.43%	6.07%	10.29	6.45%
Total available-for-sale	2.55%	3.49	3.49%	2.45%	3.57	3.98%
Held-to-Maturity
Municipal securities	4.78%	7.46	5.98%	5.31%	9.33	5.91%
Total securities	2.65%	3.68	3.60%	2.61%	3.90	4.08%

(1)	The effective duration of the securities portfolio represents the estimated percentage change in the fair value of the securities portfolio given a 100 basis point increase or decrease in the level of interest rates. This measure is used as a gauge of the portfolio’s price volatility at a single point in time and is not intended to be a precise predictor of future fair values since those values will be influenced by a number of factors.
(2)	Average life is presented in years and represents the weighted-average time to receive all future cash flows using the dollar amount of principal paydowns, including estimated principal prepayments, as the weighting factor.
(3)	Yields on municipal securities are reflected on a tax-equivalent basis, assuming a federal income tax rate of 35%.

Portfolio Composition

As of March 31, 2012, our securities portfolio totaled $1.2 billion, an increase of 15.7% compared to December 31, 2011 primarily in CMOs and other MBSs. In first quarter 2012, deposits acquired in a fourth quarter 2011 transaction that had previously been held in short-term investments were redeployed into these types of securities. Approximately 96% of our $1.2 billion available-for-sale portfolio was comprised of U.S. agency securities, municipal securities, CMOs, and other

MBSs as of March 31, 2012. The remainder consisted of seven CDOs with a fair value of $13.7 million and miscellaneous other securities totaling $33.7 million.

Investments in municipal securities comprised 41.2%, or $488.0 million, of the total available-for-sale securities portfolio at March 31, 2012, and the majority is general obligations of local municipalities. Our municipal securities portfolio has historically experienced very low default rates and provided a predictable cash flow. Available-for-sale municipal securities declined less than one percent from $490.1 million at December 31, 2011.

The average life and effective duration of our available-for-sale securities portfolio are relatively stable as of March 31, 2012 compared to December 31, 2011 as interest rates have been largely unchanged.

Securities Sales

Net securities losses were $943,000 for first quarter 2012, which included a loss of $247,000 on Visa stock, gains of $41,000 from the sale of $2.7 million in municipal securities, and an OTTI charge of $737,000 on a single CDO.

Net securities gains were $540,000 for first quarter 2011 resulting from the sale of $44.2 million in CMOs and municipal securities.

Unrealized Gains and Losses

Unrealized gains and losses on securities available-for-sale represent the difference between the aggregate cost and fair value of the portfolio and are reported, on an after-tax basis, as a separate component of stockholders’ equity in accumulated other comprehensive loss and presented in the Consolidated Statements of Comprehensive Income. This balance sheet component will fluctuate as current market interest rates and conditions change and affect the aggregate fair value of the portfolio. Net unrealized gains at March 31, 2012 were $3.2 million compared to net unrealized losses of $605,000 at December 31, 2011.

CMOs and other MBSs are either backed by U.S. government-owned agencies or issued by U.S. government-sponsored enterprises. We do not believe any individual unrealized loss on these types of securities as of March 31, 2012 represents OTTI since the unrealized losses associated with these securities are not believed to be attributable to credit quality, but rather to changes in interest rates and temporary market movements.

As of March 31, 2012, gross unrealized gains in the available-for-sale municipal securities portfolio totaled $25.3 million, and gross unrealized losses were $279,000, resulting in a net unrealized gain of $25.0 million compared to a net unrealized gain of $25.8 million as of December 31, 2011. Substantially all of these securities carry investment grade ratings with the majority of them supported by the general revenues of the issuing governmental entity and supported by third-party bond insurance or other types of credit enhancement. We do not believe the unrealized loss on any of these securities represents an OTTI.

Our investments in CDOs are supported by the credit of the underlying banks and insurance companies. The unrealized loss on these securities decreased $1.0 million since December 31, 2011. The unrealized loss reflects the difference between amortized cost and fair value that we determined did not relate to credit and reflects the market’s unfavorable bias toward these investments. We do not believe the unrealized losses on the CDOs as of March 31, 2012 represent OTTI. We currently have no evidence that would suggest further reductions in net cash flows on these investments from what has already been recognized. In addition, we do not intend to sell the CDOs with unrealized losses, and we do not believe it is more likely than not that we will be required to sell them before recovery of their amortized cost bases, which may be at maturity. Our estimation of fair values for the CDOs was based on discounted cash flow analyses as described in Note 12 of “Notes to the Condensed Consolidated Financial Statements,” in Item 1 of this Form 10-Q.

LOAN PORTFOLIO AND CREDIT QUALITY

Portfolio Composition

Our loan portfolio is comprised of both corporate and consumer loans with corporate loans representing 87.1% of total loans outstanding at March 31, 2012. The corporate loan component is comprised of commercial and industrial, agricultural, and commercial real estate lending categories. Consistent with our emphasis on relationship banking, the majority of our loans are made to our core, multi-relationship customers.

Table 7

Loan Portfolio

(Dollar amounts in thousands)

	March 31, 2012		% of Total	December 31, 2011		% of Total	Annualized % Change
Commercial and industrial	$	1,496,966	29.2	$	1,458,446	28.7	10.6
Agricultural		237,686	4.6		243,776	4.8	(10.0)
Commercial real estate:
Office		480,288	9.4		444,368	8.7	32.3
Retail		371,258	7.2		334,034	6.6	44.6
Industrial		515,353	10.0		520,680	10.2	(4.1)
Multi-family		301,356	5.9		288,336	5.7	18.1
Residential construction		99,768	1.9		105,836	2.1	(22.9)
Commercial construction		142,307	2.8		144,909	2.8	(7.2)
Other commercial real estate (1)		829,005	16.1		888,146	17.4	(26.6)
Total commercial real estate		2,739,335	53.3		2,726,309	53.5	1.9
Total corporate loans		4,473,987	87.1		4,428,531	87.0	4.1
Home equity		406,367	7.9		416,194	8.2	(9.4)
1-4 family mortgages		217,729	4.2		201,099	4.0	33.1
Installment loans		39,245	0.8		42,289	0.8	(28.8)
Total consumer loans		663,341	12.9		659,582	13.0	2.3
Total loans, excluding covered loans		5,137,328	100.0		5,088,113	100.0	3.9
Covered loans (2)		251,376			260,502		(14.0)
Total loans	$	5,388,704		$	5,348,615		3.0

(1)	Approximately $50 million of certain other commercial real estate loans as of December 31, 2011 were reclassified into other loan categories as of March 31, 2012, primarily office and retail commercial real estate.
(2)	For a detailed discussion of our covered loans and the related accounting policy for covered loans, refer to Notes 1 and 5 of “Notes to the Condensed Consolidated Financial Statements” in Item 1 of this Form 10-Q.

Total loans, including covered loans, of $5.4 billion as of March 31, 2012 were up $40.1 million, a 3.0% annualized increase, from December 31, 2011.

Excluding covered loans, total loans grew $49.2 million, or 3.9% annualized, from December 31, 2011 to March 31, 2012. We experienced over 10% annualized growth in commercial and industrial loans during this period. Continued efforts to reduce lending exposure to less favorable real estate categories contributed to a 14% annualized decline in the construction portfolios.

Commercial, Industrial, and Agricultural Loans

Commercial, industrial, and agricultural loans represent 33.8% of loans, excluding covered loans, and totaled $1.7 billion at March 31, 2012, an increase of $32.4 million, or 1.9%, from December 31, 2011. Our commercial and industrial loans are a diverse group of loans to middle market businesses generally located in the Chicago area with purposes that range from supporting seasonal working capital needs to term financing of equipment. The underwriting for these loans is primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower.

Most commercial and industrial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and may incorporate a personal guarantee.

Commercial Real Estate Loans

Commercial real estate loans represent 53.3% of loans, excluding covered loans, and totaled $2.7 billion at March 31, 2012, an increase of $13.0 million from December 31, 2011. A variety of properties serve as collateral for our commercial real estate loans, which subjects this portfolio to varying degrees of credit risk. Nearly half of our commercial real estate loans consist of loans for industrial buildings, office buildings, and retail shopping centers. Other types of commercial real estate loans include construction loans for single-family and multi-family dwellings, residential projects, and commercial projects and loans for various types of other commercial properties, such as land for future commercial development, multi-unit residential mortgages, warehouses and storage facilities, and service stations.

Included as part of our commercial real estate portfolio are loans secured by owner-occupied real estate, which tend to exhibit lower credit risk than non-owner occupied properties. These loans are viewed primarily as cash flow loans (similar to commercial and industrial loans) and secondarily as loans secured by real estate, which is reflected in the underwriting standards. At March 31, 2012, owner occupied commercial real estate loans were $1.0 billion, or almost 50%, of the commercial real estate portfolio, excluding multi-family and construction loans.

The following table presents commercial real estate loans by owner-occupied or investor status and product type.

Table 8

Commercial Real Estate Loans

(Dollar amounts in thousands)

	March 31, 2012						December 31, 2011
	Owner Occupied		Investor		Total		Owner Occupied		Investor		Total

Office, retail, and industrial:
Office	$	177,067	$	303,221	$	480,288	$	146,818	$	297,550	$	444,368
Retail		123,661		247,597		371,258		89,831		244,203		334,034
Industrial		289,058		226,295		515,353		298,887		221,793		520,680
Total office, retail, and industrial		589,786		777,113		1,366,899		535,536		763,546		1,299,082
Multi-family		-		301,356		301,356		-		288,336		288,336
Residential construction		-		99,768		99,768		-		105,836		105,836
Commercial construction		-		142,307		142,307		-		144,909		144,909
Other commercial real estate:
Rental properties (1)		32,030		101,240		133,270		31,417		95,668		127,085
Service stations and truck stops		102,719		19,258		121,977		102,870		26,061		128,931
Warehouses and storage		86,053		39,556		125,609		89,293		40,198		129,491
Hotels		-		71,757		71,757		-		73,889		73,889
Restaurants		67,367		18,053		85,420		59,460		19,407		78,867
Medical		19,555		834		20,389		19,808		1,051		20,859
Automobile dealers		30,212		4,158		34,370		31,588		4,189		35,777
Mobile home parks		-		29,967		29,967		-		30,071		30,071
Recreational		36,048		7,906		43,954		26,826		7,882		34,708
Religious		24,417		174		24,591		23,919		178		24,097
Multi-use properties		13,929		60,427		74,356		59,068		96,517		155,585
Other		24,719		38,626		63,345		8,802		39,984		48,786
Total other commercial real estate		437,049		391,956		829,005		453,051		435,095		888,146
Total commercial real estate	$	1,026,835	$	1,712,500	$	2,739,335	$	988,587	$	1,737,722	$	2,726,309
Commercial real estate loans, excluding multi-family and construction loans	$	1,026,835	$	1,169,069	$	2,195,904	$	988,587	$	1,198,641	$	2,187,228
Percent of total (2)		46.8%		53.2%				45.2%		54.8%

(1)	The owner occupied rental properties primarily represent home-based businesses.
(2)	The percent reported does not include multi-family or construction loans since the owner-occupied classification does not apply to these categories.

Non-performing Assets

The following table presents our loan portfolio by performing and non-performing status.

Table 9

Loan Portfolio by Performing/Non-Performing Status

(Dollar amounts in thousands)

					Past Due
	Total Loans		Performing		30-89 Days Past Due		90 Days Past Due		Non-accrual		TDRs (still accruing interest)
As of March 31, 2012
Commercial and industrial	$	1,496,966	$	1,431,711	$	6,054	$	3,525	$	55,158	$	518
Agricultural		237,686		236,252		159		393		882		-
Commercial real estate:
Office		480,288		468,525		1,110		250		10,403		-
Retail		371,258		364,924		612		261		5,241		220
Industrial		515,353		494,562		1,214		390		19,187		-
Multi-family		301,356		290,379		1,362		-		9,615		-
Residential construction		99,768		77,016		1,648		-		21,104		-
Commercial construction		142,307		121,510		500		-		20,297		-
Other commercial real estate		829,005		780,034		4,871		963		43,137		-
Total commercial real estate		2,739,335		2,596,950		11,317		1,864		128,984		220
Total corporate loans		4,473,987		4,264,913		17,530		5,782		185,024		738
Home equity		406,367		392,930		2,631		1,596		8,851		359
1-4 family mortgages		217,729		210,091		747		264		5,648		979
Installment loans		39,245		38,858		333		32		22		-
Total consumer loans		663,341		641,879		3,711		1,892		14,521		1,338
Total loans, excluding covered loans		5,137,328		4,906,792		21,241		7,674		199,545		2,076
Covered loans		251,376		189,900		8,387		33,825		19,264		-
Total loans	$	5,388,704	$	5,096,692	$	29,628	$	41,499	$	218,809	$	2,076
As of December 31, 2011
Commercial and industrial	$	1,458,446	$	1,397,569	$	10,283	$	4,991	$	44,152	$	1,451
Agricultural		243,776		242,727		30		-		1,019		-
Commercial real estate:
Office		444,368		436,881		-		-		7,487		-
Retail		334,034		326,922		395		52		4,923		1,742
Industrial		520,680		501,674		385		988		17,633		-
Multi-family		288,336		270,138		604		-		6,487		11,107
Residential construction		105,836		87,482		278		-		18,076		-
Commercial construction		144,909		121,562		-		-		23,347		-
Other commercial real estate		888,146		829,492		5,273		1,707		51,447		227
Total commercial real estate		2,726,309		2,574,151		6,935		2,747		129,400		13,076
Total corporate loans		4,428,531		4,214,447		17,248		7,738		174,571		14,527
Home equity		416,194		400,570		5,986		1,138		7,407		1,093
1-4 family mortgages		201,099		190,052		3,636		-		5,322		2,089
Installment loans		42,289		41,133		625		351		25		155
Total consumer loans		659,582		631,755		10,247		1,489		12,754		3,337
Total loans, excluding covered loans		5,088,113		4,846,202		27,495		9,227		187,325		17,864
Covered loans		260,502		193,044		4,232		43,347		19,879		-
Total loans	$	5,348,615	$	5,039,246	$	31,727	$	52,574	$	207,204	$	17,864

The following table provides a comparison of our non-performing assets and past due loans to prior periods.

Table 10

Non-Performing Assets and Past Due Loans

(Dollar amounts in thousands)

	2012		2011
	March 31		December 31		September 30		June 30		March 31
Non-performing assets, excluding covered loans and covered OREO
Non-accrual loans	$	199,545	$	187,325	$	171,189	$	177,495	$	186,563
90 days or more past due loans		7,674		9,227		6,008		6,502		5,231
Total non-performing loans		207,219		196,552		177,197		183,997		191,794
TDRs (still accruing interest)		2,076		17,864		7,033		14,529		14,120
Other real estate owned		35,276		33,975		23,863		24,407		33,863
Total non-performing assets	$	244,571	$	248,391	$	208,093	$	222,933	$	239,777
30-89 days past due loans	$	21,241	$	27,495	$	34,061	$	30,424	$	28,927
Non-accrual loans to total loans		3.88%		3.68%		3.35%		3.47%		3.66%
Non-performing loans to total loans		4.03%		3.86%		3.47%		3.60%		3.76%
Non-performing assets to loans plus OREO		4.73%		4.85%		4.06%		4.34%		4.67%
Covered loans and covered OREO (1)
Non-accrual loans	$	19,264	$	19,879	$	15,573	$	3,588	$	-
90 days or more past due loans		33,825		43,347		56,834		68,324		88,605
Total non-performing loans		53,089		63,226		72,407		71,912		88,605
TDRs (still accruing interest)		-		-		-		-		-
Other real estate owned		16,990		23,455		21,594		14,583		21,543
Total non-performing assets	$	70,079	$	86,681	$	94,001	$	86,495	$	110,148
30-89 days past due loans	$	8,387	$	4,232	$	11,070	$	26,180	$	10,399
Non-performing assets, including covered loans and covered OREO
Non-accrual loans	$	218,809	$	207,204	$	186,762	$	181,083	$	186,563
90 days or more past due loans		41,499		52,574		62,842		74,826		93,836
Total non-performing loans		260,308		259,778		249,604		255,909		280,399
TDRs (still accruing interest)		2,076		17,864		7,033		14,529		14,120
Other real estate owned		52,266		57,430		45,457		38,990		55,406
Total non-performing assets	$	314,650	$	335,072	$	302,094	$	309,428	$	349,925
30-89 days past due loans	$	29,628	$	31,727	$	45,131	$	56,604	$	39,326
Non-accrual loans to total loans		4.06%		3.87%		3.46%		3.34%		3.43%
Non-performing loans to total loans		4.83%		4.86%		4.63%		4.71%		5.15%
Non-performing assets to loans plus OREO		5.78%		6.20%		5.55%		5.66%		6.36%

(1)	For a discussion of covered loans and covered OREO, refer to Note 5 of “Notes to Condensed Consolidated Financial Statements” in Item 1 of this Form 10-Q.

Non-performing covered loans and covered OREO were recorded at their estimated fair values at the time of acquisition. These assets are covered by FDIC Agreements that substantially mitigate the risk of loss. Past due covered loans in the table above are past due based on contractual terms but continue to perform in accordance with our expectations of cash flows. Covered loans are generally considered accruing loans. However, the timing and amount of future cash flows for some loans may not be reasonably estimable. Those loans were classified as non-accrual loans, and interest income will not be recognized until the timing and amount of the future cash flows can be reasonably estimated.

return of $16.0 million in TDRs to performing status, and $8.5 million in OREO dispositions, largely offset by the downgrade of performing loans. For further discussion of OREO dispositions, refer to the “OREO” section of this Item 2.

Loans 30 to 89 days past due, excluding covered loans, of $21.2 million at March 31, 2012 declined $6.3 million, or 22.7%, from December 31, 2011. This represents the lowest level of 30 to 89 days past due loans since 2003.

Management continues to pursue the remediation of non-performing assets in accordance with the previously-established disposition strategies. As management works to dispose of non-performing assets, our efforts could be impacted by a number of factors, including but not limited to, the pace and timing of the overall recovery of the economy, illiquidity in the real estate market, and higher levels of foreclosed real estate coming into the market.

Non-accrual Loans

Non-accrual loans, excluding covered loans, grew from $187.3 million at December 31, 2011 to $199.5 million at March 31, 2012 as the amount of loans downgraded from performing to non-accrual status exceeded sales, payments, charge-offs, and transfers to OREO during the first quarter of 2012.

Included in loans downgraded to non-accrual for first quarter 2012 were nine loans totaling approximately $25 million, the majority of which were included in potential problem loans as of December 31, 2011. Refer to the “Potential Problem Loans” section of this Item 2 for additional discussion.

A discussion of our accounting policies for non-accrual loans is contained in Note 1 of “Notes to Consolidated Financial Statements” in Item 1 of this Form 10-Q.

Construction Portfolio

Construction loans totaled $242.1 million at March 31, 2012, a reduction of $8.7 million, or 3.5%, from December 31, 2011. This portfolio represents loans to developers and home builders and is particularly susceptible to declining real estate values. Non-performing construction loans totaled $41.4 million at March 31, 2012, which is consistent with the December 31, 2011 level.

The following table provides details on the nature of these construction portfolios.

Table 11

Construction Loans by Underlying Collateral, Excluding Covered Loans

(Dollar amounts in thousands)

	Residential Construction			Commercial Construction			Combined
	Amount		Percent of Total	Amount		Percent of Total	Amount		Percent of Total
As of March 31, 2012
Raw Land	$	25,103	25.2	$	47,003	33.0	$	72,106	29.8
Developed Land		49,356	49.4		52,967	37.2		102,323	42.3
Construction		10,329	10.4		13,709	9.6		24,038	9.9
Substantially completed structures		13,863	13.9		27,984	19.7		41,847	17.3
Mixed and other		1,117	1.1		644	0.5		1,761	0.7
Total	$	99,768	100.0	$	142,307	100.0	$	242,075	100.0
Weighted-average maturity (in years)		0.72			0.86			0.80
Non-performing loans	$	21,104		$	20,297		$	41,401
Non-performing loans as a percent of total loans		21.2%			14.3%			17.1%
As of December 31, 2011
Raw land	$	24,981	23.6	$	42,768	29.5	$	67,749	27.0
Developed land		55,501	52.4		57,949	40.0		113,450	45.3
Construction		12,133	11.5		14,415	9.9		26,548	10.6
Substantially completed structures		12,195	11.5		27,221	18.8		39,416	15.7
Mixed and other		1,026	1.0		2,556	1.8		3,582	1.4
Total	$	105,836	100.0	$	144,909	100.0	$	250,745	100.0
Weighted-average maturity (in years)		0.63			0.74			0.69
Non-performing loans	$	18,076		$	23,347		$	41,423
Non-performing loans as a percent of total loans		17.1%			16.1%			16.5%

Six credits primarily in the raw land category represent 67.3% of the $41.4 million in non-performing construction loans as of March 31, 2012, with the largest single loan totaling $14.0 million. Life-to-date charge-offs on these six credits totaled $6.5 million and valuation allowances related to these loans totaled $2.8 million as of March 31, 2012.

TDRs

Table 12

TDRs by Type

(Dollar amounts in thousands)

	March 31, 2012			December 31, 2011			March 31, 2011
	Number of Loans	Amount		Number of Loans	Amount		Number of Loans	Amount
Commercial and industrial	15	$	1,758	20	$	2,348	28	$	22,569
Agricultural	-		-	-		-	-		-
Commercial real estate:
Office	-		-	-		-	-		-
Retail	1		220	2		1,742	-		-
Industrial	-		-	-		-	1		1,828
Multi-family	8		1,758	9		12,865	8		3,078
Commercial construction	1		14,006	1		14,006	4		4,539
Other commercial real estate	7		11,467	9		11,644	7		6,588
Total commercial real estate loans	17		27,451	21		40,257	20		16,033
Home equity loans	11		768	25		1,564	22		1,641
1-4 family mortgages	17		2,059	26		3,382	23		2,944
Installment loans	-		-	1		155	-		-
Total consumer loans	28		2,827	52		5,101	45		4,585
Total TDRs	60	$	32,036	93	$	47,706	93	$	43,187
TDRs, still accruing interest	17	$	2,076	57	$	17,864	53	$	14,120
TDRs included in non-accrual	43		29,960	36		29,842	40		29,067
Total TDRs	60	$	32,036	93	$	47,706	93	$	43,187
Year-to-date charge-offs on TDRs		$	-		$	8,890		$	63
Valuation allowance related to TDRs		$	916		$	94		$	519

At March 31, 2012, we had TDRs totaling $32.0 million, a decrease of $15.7 million from December 31, 2011. The March 31, 2012 total includes $2.1 million in loans that were restructured at market terms and are accruing interest compared to $17.9 million as of December 31, 2011. During first quarter 2012, we returned $16.0 million in accruing TDRs to performing status since they exhibited a sufficient period of performance under the restructured terms

We have other TDRs totaling $30.0 million as of March 31, 2012, which are classified as non-accrual because they are not performing in accordance with their modified terms or there has not yet been sufficient performance under the modified terms. We occasionally restructure loans at other than market rates or terms to enable the borrower to work through financial difficulties for a set period of time.

Potential Problem Loans

Potential problem loans consist of special mention loans and substandard loans that continue to accrue interest. These loans are performing in accordance with contractual terms, but management has concerns about the ability of the obligor to continue to comply with contractual terms because of the obligor’s potential operating or financial difficulties.

Table 13

Potential Problem Loans

(Dollar amounts in thousands)

	March 31, 2012		December 31, 2011		March 31, 2011
Special mention loans (1)	$	234,055	$	276,577	$	399,477
Substandard loans (2)		123,316		126,657		182,842
Total potential problem loans	$	357,371	$	403,234	$	582,319

(1)	Loans categorized as special mention exhibit potential weaknesses that require the close attention of management, since these potential weaknesses may result in the deterioration of repayment prospects at some future date.
(2)	Loans categorized as substandard continue to accrue interest, but exhibit a well-defined weakness or weaknesses that may jeopardize the liquidation of the debt. The loans continue to accrue interest because they are well secured and collection of principal and interest is expected within a reasonable time.

Potential problem loans totaled $357.4 million as of March 31, 2012, down $45.9 million, or 11.4%, from December 31, 2011 and down $224.9 million, or 38.6% from March 31, 2011. The declines from both prior periods reflect management’s continuing success in remediating potential problem loans. As of March 31, 2012, 11 borrowers, each having balances greater than $5 million, comprised approximately 30% of potential problem loans.

OREO

OREO consists of properties acquired as the result of borrower defaults on loans. A discussion of our accounting policies for non-accrual loans is contained in Note 1 of “Notes to Consolidated Financial Statements” in Item 1 of this Form 10-Q.

Table 14

OREO Properties by Type

(Dollar amounts in thousands)

	March 31, 2012			December 31, 2011			March 31, 2011
	Number of Properties	Amount		Number of Properties	Amount		Number of Properties	Amount
Single family homes	13	$	2,340	5	$	985	13	$	1,336
Land parcels:
Raw land	8		5,047	8		8,316	5		7,467
Farmland	1		207	-		-	3		3,562
Commercial lots	16		5,482	19		5,944	16		7,165
Single-family lots	25		6,803	25		7,677	24		5,659
Total land parcels	50		17,539	52		21,937	48		23,853
Multi-family units	6		609	4		3,083	3		343
Commercial properties	21		14,788	16		7,970	13		8,331
Total OREO, excluding covered OREO	90		35,276	77		33,975	77		33,863
Covered OREO	44		16,990	46		23,455	46		21,543
Total OREO properties	134	$	52,266	123	$	57,430	123	$	55,406

OREO, excluding covered OREO, was $35.3 million at March 31, 2012 compared to $34.0 million at December 31, 2011 and $33.9 million at March 31, 2011.

Table 15

Disposals of OREO Properties

(Dollar amounts in thousands)

	Quarter Ended March 31, 2012						Quarter Ended March 31, 2011
	OREO		Covered OREO		Total		OREO		Covered OREO		Total
OREO sales
Proceeds from sales	$	8,830	$	8,326	$	17,156	$	7,114	$	1,125	$	8,239
Less: Basis of properties sold		8,532		8,237		16,769		8,210		1,144		9,354
Net gains (losses) on sales of OREO	$	298	$	89	$	387	$	(1,096)	$	(19)	$	(1,115)

OREO write-downs	$	691	$	(1)	$	690	$	1,101	$	11	$	1,112

OREO sales, excluding covered OREO, consisted of 13 properties for the quarter ended March 31, 2012, with the majority classified as raw land and multi-family units.

OREO sales, excluding covered OREO, consisted of 28 properties for the quarter ended March 31, 2011, with the majority classified as farmland; office, retail, and industrial; and 1-4 family.

Allowance for Credit Losses

The allowance for credit losses is comprised of the allowance for loan losses and the reserve for unfunded commitments and is maintained by management at a level believed adequate to absorb estimated losses inherent in the existing loan portfolio. Determination of the allowance for credit losses is inherently subjective since it requires significant estimates and management judgment, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans, consideration of current economic trends, and other factors.

While management utilizes its best judgment and information available, the ultimate adequacy of the allowance for credit losses depends on a variety of factors beyond the Company’s control, including the performance of its loan portfolio, the economy, changes in interest rates and property values, and the interpretation of loan risk classifications by regulatory authorities. Management believes that the allowance for credit losses is an appropriate estimate of credit losses inherent in the loan portfolio as of March 31, 2012.

The accounting policies underlying the establishment and maintenance of the allowance for credit losses are discussed in Note 1 of “Notes to Consolidated Financial Statements” in Item 1 of this Form 10-Q.

Table 16

Allowance for Credit Losses

and Summary of Loan Loss Experience

(Dollar amounts in thousands)

	Quarters Ended
	2012		2011
	March 31		December 31		September 30		June 30		March 31
Change in allowance for credit losses:
Balance at beginning of quarter	$	121,962	$	131,291	$	139,831	$	145,003	$	145,072
Loans charged-off:
Commercial and industrial		(8,170)		(9,451)		(10,761)		(6,003)		(4,965)
Agricultural		(20)		(484)		(177)		(900)		(9)
Office, retail, and industrial		(2,667)		(3,798)		(2,549)		(647)		(1,199)
Multi-family		(140)		(5,139)		(2,244)		(6,652)		(549)
Residential construction		(683)		(2,498)		(2,314)		(3,661)		(5,422)
Commercial construction		(170)		(1,673)		(4,197)		(185)		(261)
Other commercial real estate		(8,184)		(3,021)		(4,490)		(2,484)		(5,401)
Consumer		(2,152)		(2,311)		(1,909)		(2,767)		(2,424)
1-4 family mortgages		(226)		(199)		(333)		(341)		(247)
Total loans charged-off		(22,412)		(28,574)		(28,974)		(23,640)		(20,477)
Recoveries on loans previously charged-off:
Commercial and industrial		646		541		596		418		1,837
Agricultural		70		-		-		101		-
Office, retail, and industrial		2		19		6		38		16
Multi-family		131		336		74		-		-
Residential construction		220		-		64		2,762		4
Commercial construction		-		-		82		52		-
Other commercial real estate		7		19		69		377		43
Consumer		186		112		129		64		107
1-4 family mortgages		16		3		13		1		1
Total recoveries on loans previously charged-off		1,278		1,030		1,033		3,813		2,008
Net loans charged-off, excluding covered loans		(21,134)		(27,544)		(27,941)		(19,827)		(18,469)
Net charge-offs of covered loans		(274)		(3,687)		(1,024)		(4,108)		(1,092)
Net loans charged off		(21,408)		(31,231)		(28,965)		(23,935)		(19,561)
Provision charged to operating expense:
Provision, excluding provision for covered loans		17,932		18,249		18,378		14,655		18,400
Provision for covered loans		1,387		16,139		5,271		22,356		7,501
Less: expected reimbursement from the FDIC		(1,109)		(12,486)		(3,224)		(18,248)		(6,409)
Net provision for covered loans		278		3,653		2,047		4,108		1,092
Total provision charged to operating expense		18,210		21,902		20,425		18,763		19,492
Balance at end of quarter	$	118,764	$	121,962	$	131,291	$	139,831	$	145,003
Allowance for loan losses	$	116,264	$	119,462	$	128,791	$	137,331	$	142,503
Reserve for unfunded commitments		2,500		2,500		2,500		2,500		2,500
Total allowance for credit losses	$	118,764	$	121,962	$	131,291	$	139,831	$	145,003

	Quarters Ended
	2012		2011
	March 31		December 31		September 30		June 30		March 31
Average loans (1)	$	5,089,286	$	5,085,792	$	5,136,130	$	5,108,234	$	5,075,840
Net loans charged-off to average loans (1), annualized		1.67%		2.15%		2.16%		1.56%		1.48%
Allowance for credit losses at end of period as a percent of:
Total loans (1)		2.31%		2.40%		2.57%		2.73%		2.85%
Non-accrual loans (1)		60%		65%		77%		79%		78%
Non-performing loans (1)		57%		62%		74%		76%		76%
Average loans, including covered loans	$	5,345,074	$	5,365,286	$	5,440,354	$	5,443,761	$	5,438,978
Net loans charged-off to average loans, annualized		1.61%		2.31%		2.11%		1.76%		1.46%
Allowance for credit losses at end of period as a percent of:
Total loans		2.20%		2.28%		2.43%		2.58%		2.66%
Non-accrual loans		54%		59%		70%		77%		78%
Non-performing loans		46%		47%		53%		55%		52%

(1)	Excludes covered loans.

The allowance for credit losses represented 2.31% of total loans outstanding, excluding covered loans, at March 31, 2012 compared to 2.40% at December 31, 2011. The allowance for credit losses declined $3.2 million from $122.0 million as of December 31, 2011 to $118.8 million as of March 31, 2012. During the first quarter of 2012, we saw declines in 30 to 89 days past due loans and potential problem loans, which drove a decrease in our estimate of credit losses inherent in the loan portfolio and the amount of allowance for credit losses deemed appropriate to cover those losses.

Net charge-offs for first quarter 2012 were $21.4 million, up $1.8 million, or 9.4%, from first quarter 2011. The elevated level of charge-offs in other commercial real estate loans during first quarter 2012 resulted from the write-down of three credits, including one that was transferred to held-for-sale status and sold in April 2012.

Charge-offs related to covered loans for first quarter 2012 and first quarter 2011 reflect the decline in estimated cash flows of certain acquired loans, net of the reimbursement from the FDIC under the FDIC Agreements. Management re-estimates cash flows periodically, and any declines in estimated cash flows on a present value basis, net of loss share, are reflected as charge-offs in that period. Conversely, any increases in estimated cash flows, net of loss share, are recorded through prospective yield adjustments over the remaining lives of the specific loans. To date, cumulative increases in estimated cash flows exceeded cumulative declines.

FUNDING AND LIQUIDITY MANAGEMENT

The following table provides a comparison of average funding sources for the quarters ended March 31, 2012, December 31, 2011, and March 31, 2011. We believe that average balances, rather than period-end balances, are more meaningful in analyzing funding sources because of the inherent fluctuations that may occur on a monthly basis within most funding categories.

Table 17

Funding Sources – Average Balances

(Dollar amounts in thousands)

	Quarters Ended						First Quarter 2012 % Change From
	March 31, 2012		December 31, 2011		March 31, 2011		Fourth Quarter 2011	First Quarter 2011
Demand deposits	$	1,591,198	$	1,613,221	$	1,342,013	(1.4)	18.6
Savings deposits		995,955		952,962		901,205	4.5	10.5
NOW accounts		1,051,870		1,062,993		1,044,280	(1.0)	0.7
Money market accounts		1,184,316		1,237,600		1,240,439	(4.3)	(4.5)
Transactional deposits		4,823,339		4,866,776		4,527,937	(0.9)	6.5
Time deposits		1,601,518		1,669,348		1,914,486	(4.1)	(16.3)
Brokered deposits		20,408		19,647		23,404	3.9	(12.8)
Total time deposits		1,621,926		1,688,995		1,937,890	(4.0)	(16.3)
Total deposits		6,445,265		6,555,771		6,465,827	(1.7)	(0.3)
Repurchase agreements		91,048		87,893		148,347	3.6	(38.6)
FHLB advances		112,500		164,946		137,500	(31.8)	(18.2)
Total borrowed funds		203,548		252,839		285,847	(19.5)	(28.8)
Senior and subordinated debt		248,232		187,488		137,745	32.4	80.2
Total funding sources	$	6,897,045	$	6,996,098	$	6,889,419	(1.4)	0.1
Average interest rate paid on borrowed funds		1.02%		1.05%		0.96%
Weighted-average maturity of FHLB advances		29.6 months		19.3 months		24.6 months
Weighted-average interest rate of FHLB advances		1.71%		2.13%		1.95%

Average funding sources for first quarter 2012 declined $99.1 million, or 1.4%, from fourth quarter 2011 due to a $160.0 million, or 2.3%, seasonal decline in deposits and borrowed funds, partially offset by a $60.7 million, or 32.4%, increase in senior and subordinated debt.

Average funding sources grew $7.6 million from first quarter 2011 to first quarter 2012. Growth of $249.2 million, or 18.6%, in demand deposits offset a decline in interest-bearing liabilities, which resulted in a more favorable product mix.

The growth in average senior and subordinated debt for first quarter 2012 compared to both prior periods reflects the issuance of $115.0 million in senior debt in fourth quarter 2011, which was used to partially fund the redemption of the Series B preferred stock issued to the Treasury.

Table 18

Borrowed Funds

(Dollar amounts in thousands)

	March 31, 2012			March 31, 2011
	Amount		Rate (%)	Amount		Rate (%)
At period-end:
Securities sold under agreements to repurchase	$	89,655	0.01	$	135,842	0.02
FHLB advances		112,500	1.71		137,500	1.95
Total borrowed funds	$	202,155	0.96	$	273,342	0.99
Average for the year-to-date period:
Securities sold under agreements to repurchase	$	91,048	0.01	$	148,347	0.03
FHLB advances		112,000	1.83		137,500	1.98
Total borrowed funds	$	203,048	1.02	$	285,847	0.96
Maximum amount outstanding at the end of any day during the period:
Securities sold under agreements to repurchase	$	103,591		$	174,810
FHLB advances		112,500			137,500

Securities sold under repurchase agreements declined from March 31, 2011 to March 31, 2012 as certain municipal customers shifted balances into demand deposits, which are insured by the FDIC.

Average borrowed funds totaled $203.0 million for first quarter 2012, decreasing $82.8 million, or 29.0%, from first quarter 2011. The increase in demand deposits during this period reduced our reliance on these higher-costing funds.

Securities sold under agreements to repurchase, federal funds purchased, and term auction facilities generally mature within 1 to 90 days from the transaction date.

MANAGEMENT OF CAPITAL

A strong capital structure is crucial in maintaining investor confidence, accessing capital markets, and enabling us to take advantage of future profitable growth opportunities. Our capital policy requires that the Company and the Bank maintain capital ratios in excess of the minimum regulatory guidelines. It serves as an internal discipline in analyzing business risks and internal growth opportunities and sets targeted levels of return on equity. Under regulatory capital adequacy guidelines, the Company and the Bank are subject to various capital requirements set and administered by the federal banking agencies. These requirements specify minimum capital ratios, defined as Tier 1 and total capital as a percentage of assets and off-balance sheet items that were weighted according to broad risk categories and a leverage ratio calculated as Tier 1 capital as a percentage of adjusted average assets. We manage our capital ratios for both the Company and the Bank to consistently maintain such measurements in excess of the Federal Reserve’s minimum levels considered to be “well-capitalized,” which is the highest capital category established.

The following table presents our consolidated measures of capital as of the dates presented and the capital guidelines established by the Federal Reserve to be categorized as “well-capitalized.” All regulatory mandated ratios for characterization as “well-capitalized” were exceeded as of March 31, 2012 and December 31, 2011.

Table 19

Capital Measurements

(Dollar amounts in thousands)

	March 31, 2012	December 31, 2011	Regulatory Minimum For “Well- Capitalized”	Excess Over Required Minimums at March 31, 2012
Regulatory capital ratios:
Total capital to risk-weighted assets	13.47%	13.68%	10.00%	35%	$	217,431
Tier 1 capital to risk-weighted assets	11.41%	11.61%	6.00%	90%	$	338,648
Tier 1 leverage to average assets	9.38%	9.28%	5.00%	88%	$	333,429
Tier 1 common capital to risk-weighted assets (1)	10.38%	10.26%	N/A (2)	N/A (2)		N/A (2)
Tangible common equity ratios:
Tangible common equity to tangible assets	8.95%	8.83%	N/A (2)	N/A (2)		N/A (2)
Tangible common equity, excluding other accumulated comprehensive loss, to tangible assets	9.10%	9.00%	N/A (2)	N/A (2)		N/A (2)
Tangible common equity to risk- weighted assets	11.01%	10.88%	N/A (2)	N/A (2)		N/A (2)
Regulatory capital ratios, Bank only (3):
Total capital to risk-weighted assets	14.58%	14.37%	10.00%	46%	$	281,135
Tier 1 capital to risk-weighted assets	13.32%	13.11%	6.00%	122%	$	449,401
Tier 1 leverage to average assets	10.82%	10.37%	5.00%	116%	$	439,937

(1)	Excludes the impact of trust-preferred securities.
(2)	Ratio is not subject to formal Federal Reserve regulatory guidance.
(3)	Ratio presented pertains to our wholly owned banking subsidiary, First Midwest Bank.

All other ratios presented in the table above are capital adequacy metrics used and relied on by investors and industry analysts; however, they are non-GAAP financial measures for U.S. Securities and Exchange Commission purposes. These non-GAAP measures are valuable indicators of a financial institution’s capital strength since they eliminate intangible assets from stockholders’ equity and retain the effect of accumulated other comprehensive loss in stockholders’ equity. Reconciliations of the components of those ratios to GAAP are presented in the table below.

In first quarter 2012, we redeemed and retired approximately $21 million of 6.95% trust preferred junior subordinated debentures (“TRUPs”) at a discount of 2.25%. This transaction resulted in the recognition of a pre-tax gain of $256,000. Although the TRUPs were included as a component of Tier 1 capital, we elected to retire them given the low interest rate environment.

The Board of Directors reviews the Company’s capital plan each quarter, considering the current and expected operating environment as well as an evaluation of various capital alternatives.

Table 20

Reconciliation of Capital Components to Regulatory Requirements and GAAP

(Dollar amounts in thousands)

	March 31, 2012		December 31, 2011
Reconciliation of Capital Components to Regulatory Requirements
Total regulatory capital, as defined in federal regulations	$	843,798	$	853,961
Tier 1 capital, as defined in federal regulations	$	714,468	$	724,863
Trust preferred securities included in Tier 1 capital		(64,265)		(84,730)
Tier 1 common capital	$	650,203	$	640,133
Risk-weighted assets, as defined in federal regulations	$	6,263,673	$	6,241,191
Average assets, as defined in federal regulations		7,620,777		7,813,637
Total capital to risk-weighted assets		13.47%		13.68%
Tier 1 capital to risk-weighted assets		11.41%		11.61%
Tier 1 common capital to risk-weighted assets		10.38%		10.26%
Tier 1 leverage to average assets		9.38%		9.28%
Reconciliation of Capital Components to GAAP
Total stockholder’s equity	$	972,701	$	962,587
Goodwill and other intangible assets		(282,815)		(283,650)
Tangible common equity		689,886		678,937
Accumulated other comprehensive loss		10,919		13,276
Tangible common equity, excluding accumulated other comprehensive loss	$	700,805	$	692,213
Total assets	$	7,988,002	$	7,973,594
Goodwill and other intangible assets		(282,815)		(283,650)
Tangible assets	$	7,705,187	$	7,689,944
Tangible common equity to tangible assets		8.95%		8.83%
Tangible common equity, excluding accumulated other comprehensive loss, to tangible assets		9.10%		9.00%
Tangible common equity to risk-weighted assets		11.01%		10.88%

CRITICAL ACCOUNTING POLICIES

Our consolidated financial statements are prepared in accordance with GAAP and are consistent with predominant practices in the financial services industry. Critical accounting policies are those policies that management believes are the most important to our financial position and results of operations. Application of critical accounting policies requires management to make estimates, assumptions, and judgments based on information available as of the date of the financial statements that affect the amounts reported in the financial statements and accompanying notes. Future changes in information may affect these estimates, assumptions, and judgments, which, in turn, may affect amounts reported in the financial statements.

We have numerous accounting policies, of which the most significant are presented in Note 1, “Summary of Significant Accounting Policies,” to the Consolidated Financial Statements of our 2011 10-K. These policies, along with the disclosures presented in “Notes to Condensed Consolidated Financial Statements” in Item 1 of this Form 10-Q, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management determined that our accounting policies with respect to the allowance for credit losses, evaluation of impairment of securities, and income taxes are the accounting areas requiring subjective or complex judgments that are most important to our financial position and results of operations, and, therefore, are considered to be critical accounting policies, as discussed in our 2011 10-K.

ITEM 3. QUANTITATIVE AND QUALITATIVE

DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates, and equity prices. Interest rate risk is our primary market risk and is the result of repricing, basis, and option risk. A description and analysis of our interest rate risk management policies is included in Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” contained in our 2011 10-K.

We seek to achieve consistent growth in net interest income and net income while managing volatility that arises from shifts in interest rates. The Bank’s Asset and Liability Committee (“ALCO”) oversees financial risk management by developing programs to measure and manage interest rate risks within authorized limits set by the Bank’s Board of Directors. ALCO also approves the Bank’s asset and liability management policies, oversees the formulation and implementation of strategies to improve balance sheet positioning and earnings, and reviews the Bank’s interest rate sensitivity position. Management uses net interest income and economic value of equity simulation modeling tools to analyze and capture short-term and long-term interest rate exposures.

Net Interest Income Sensitivity

The analysis of net interest income sensitivities assesses the magnitude of changes in net interest income resulting from changes in interest rates over a 12-month horizon using multiple rate scenarios. These scenarios include, but are not limited to, a most likely forecast, a flat to inverted or unchanged rate environment, a gradual increase and decrease of 200 basis points that occur in equal steps over a six-month time horizon, and immediate increases and decreases of 200 and 300 basis points.

This simulation analysis is based on actual cash flows and repricing characteristics for balance sheet and off-balance sheet instruments and incorporates market-based assumptions regarding the effect of changing interest rates on the prepayment rates of certain assets and liabilities. This simulation analysis includes management’s projections for activity levels in each of the product lines we offer. The analysis also incorporates assumptions based on the historical behavior of deposit rates and balances in relation to interest rates. Because these assumptions are inherently uncertain, the simulation analysis cannot definitively measure net interest income or predict the impact of the fluctuation in interest rates on net interest income. Actual results may differ from simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in market conditions and management strategies.

We monitor and manage interest rate risk within approved policy limits. Our current interest rate risk policy limits are determined by measuring the change in net interest income over a 12-month horizon.

Analysis of Net Interest Income Sensitivity

(Dollar amounts in thousands)

	Gradual Change in Rates (1)				Immediate Change in Rates
	-200		+200		-200		+200		-300 (2)		+300
March 31, 2012:
Dollar change	$	(10,019)	$	6,101	$	(13,212)	$	10,121	$	N/M	$	22,132
Percent change		-3.7%		+2.3%		-4.9%		3.7%		N/M		+8.2%
December 31, 2011:
Dollar change	$	(8,457)	$	13,392	$	(13,983)	$	19,209	$	N/M	$	36,576
Percent change		-3.1%		+4.9%		-5.2%		+7.1%		N/M		+13.5%

(1)	Reflects an assumed uniform change in interest rates across all terms that occurs in equal steps over a six-month horizon.
(2)	N/M – Due to the low level of interest rates as of March 31, 2012 and December 31, 2011, management deemed an assumed 300 basis point drop in interest rates not meaningful.

Overall, in rising interest rate scenarios, interest rate risk volatility is less positive at March 31, 2012 than at December 31, 2011 and in declining interest rate scenarios, interest rate risk volatility is more negative at March 31, 2012 compared to December 31, 2011. In first quarter 2012, deposits acquired in a fourth quarter 2011 transaction that had previously been held in short-term investments were redeployed into securities, specifically CMOs and other MBSs. This reinvestment drove the change in interest rate sensitivity from December 31, 2011 to March 31, 2012. While the negative exposure to net interest income is higher compared to December 31, 2011, the risk of significant rate declines is small, since interest rates remain at low levels.

Economic Value of Equity

In addition to the simulation analysis, management uses an economic value of equity sensitivity technique to understand the risk in both shorter-term and longer-term positions and to study the impact of longer-term cash flows on earnings and capital. In determining the economic value of equity, we discount present values of expected cash flows on all assets, liabilities, and off-balance sheet contracts under different interest rate scenarios. The discounted present value of all cash flows represents our economic value of equity. Economic value of equity does not represent the true fair value of asset, liability, or derivative positions because certain factors are not considered, such as credit risk, liquidity risk, and the impact of future changes to the balance sheet.

Analysis of Economic Value of Equity

(Dollar amounts in thousands)

	Immediate Change in Rates
	-200		+200		-300 (1)		+300
March 31, 2012:
Dollar change	$	(128,864)	$	112,320	$	N/M	$	164,447
Percent change		-10.3%		+9.0%		N/M		+13.2%
December 31, 2011:
Dollar change	$	(168,853)	$	148,369	$	N/M	$	221,525
Percent change		-13.3%		+11.7%		N/M		+17.4%

(1)	N/M- Due to the low level of interest rates as of March 31, 2012 and December 31, 2011, management deemed an assumed 300 basis point drop in interest rates not meaningful.

As of March 31, 2012, the estimated sensitivity of the economic value of equity to changes in rising interest rates is less positive compared to December 31, 2011, and the estimated sensitivity to falling rates is less negative compared to December 31, 2011. The change from December 31, 2011 is due to the investment of interest-bearing cash into securities described in the previous section. In addition, during first quarter 2012, approximately $21 million of TRUPS were redeemed and retired. The decrease in these long-term liabilities reduced exposure to rising rates.

ITEM 4. CONTROLS AND PROCEDURES

At the end of the period covered by this report, (the “Evaluation Date”), the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s President and Chief Executive Officer and its Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on that evaluation, the President and Chief Executive Officer and Executive Vice President and Chief Financial Officer concluded that as of the Evaluation Date, the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms. There were no changes in the Company’s internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The nature of the business of the Bank and the Company’s other subsidiaries ordinarily results in a certain amount of claims, litigation, investigations, and legal and administrative cases and proceedings, all of which are considered incidental to the normal conduct of business. In managing such matters, management considers the merits and feasibility of all options and strategies available to the Company, including litigation prosecution, arbitration, insurance coverage, and settlement. Generally, if the Company determines it has meritorious defenses to a matter, it vigorously defends itself.

pursuant to debit card transactions, and alleges, among other things, that these practices resulted in customers being unfairly assessed overdraft fees. The lawsuit seeks an unspecified amount of damages and other relief, including restitution.

Currently, there are certain other legal proceedings pending against the Company and its subsidiaries in the ordinary course of business. While the outcome of any legal proceeding is inherently uncertain, based on information currently available, the Company’s management believes that any liabilities arising from pending legal matters are not expected to have a material adverse effect on the Company’s financial position, results of operations, or cash flows.

ITEM 1A. RISK FACTORS

The Company provided a discussion of certain risks and uncertainties faced by the Company in its Annual Report on Form 10-K for the year ended December 31, 2011. However, these factors may not be the only risks or uncertainties the Company faces.

Based on currently available information, the Company has not identified any additional material changes in the Company’s risk factors as previously disclosed, except as discussed above.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table summarizes the Company’s monthly common stock purchases during first quarter 2012. The Board approved a stock repurchase program on November 27, 2007. Up to 2.5 million shares of the Company’s common stock may be repurchased, and the total remaining authorization under the program was 2,494,747 shares as of December 31, 2011. The repurchase program has no set expiration or termination date.

Issuer Purchases of Equity Securities

(Number of shares in thousands)

	Total Number of Shares Purchased (1)	Average Price Paid per Share		Total Number of Shares Purchased as Part of a Publicly Announced Plan or Program	Maximum Number of Shares that May Yet Be Purchased Under the Plan or Program
January 1 – January 31, 2012	892	$	10.55	-	2,494,747
February 1 – February 29, 2012	60,916		11.78	-	2,494,747
March 1 – March 31, 2012	-		-	-	2,494,747
Total	61,808	$	11.77	-

(1)

Consists of shares acquired pursuant to the Company’s share-based compensation plans and not the Company’s repurchase program approved by its Board on November 27, 2007. Under the terms of these plans, the Company accepts shares of common stock from option holders if they elect to surrender previously owned shares upon exercise to cover the exercise price of the stock options or, in the case of restricted shares of common stock, the withholding of shares to satisfy tax withholding obligations associated with the vesting of restricted shares.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit Number	Description of Documents	Sequential Page #
3.1	Restated Certificate of Incorporation of First Midwest Bancorp, Inc. is herein incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 27, 2009.
3.2	Restated By-laws of First Midwest Bancorp, Inc. is herein incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2012.
11	Statement re: Computation of Per Share Earnings - The computation of basic and diluted earnings per common share is included in Note 7 of the Company’s Notes to Condensed Consolidated Financial Statements included in “ITEM 1. FINANCIAL STATEMENTS” of this document.
15	Acknowledgment of Independent Registered Public Accounting Firm.
31.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 (1)	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 (1)	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99	Report of Independent Registered Public Accounting Firm.
101 (1)	Interactive Data File.

(1)

Furnished, not filed.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

First Midwest Bancorp, Inc.

/s/ PAUL F. CLEMENS

Paul F. Clemens

Executive Vice President, Chief Financial Officer,

and Principal Accounting Officer*

Date: May 10, 2012

* Duly authorized to sign on behalf of the registrant.